Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition, 41716-41778 [2020-13739]
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Federal Register / Vol. 85, No. 133 / Friday, July 10, 2020 / Proposed Rules
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[Docket No. CFPB–2020–0020]
RIN 3170–AA98
Qualified Mortgage Definition Under
the Truth in Lending Act (Regulation
Z): General QM Loan Definition
Bureau of Consumer Financial
Protection.
ACTION: Proposed rule with request for
public comment.
AGENCY:
With certain exceptions,
Regulation Z requires creditors to make
a reasonable, good faith determination
of a consumer’s ability to repay any
residential mortgage loan, and loans that
meet Regulation Z’s requirements for
‘‘qualified mortgages’’ (QMs) obtain
certain protections from liability. One
category of QMs is the General QM loan
category. For General QM loans, the
ratio of the consumer’s total monthly
debt to total monthly income (DTI ratio)
must not exceed 43 percent. In this
notice of proposed rulemaking, the
Bureau proposes certain amendments to
the General QM loan definition in
Regulation Z. Among other things, the
Bureau proposes to remove the General
QM loan definition’s 43 percent DTI
limit and replace it with a price-based
threshold. Another category of QMs is
loans that are eligible for purchase or
guarantee by either the Federal National
Mortgage Association (Fannie Mae) or
the Federal Home Loan Mortgage
Corporation (Freddie Mac) (governmentsponsored enterprises, or GSEs), while
operating under the conservatorship or
receivership of the Federal Housing
Finance Agency (FHFA). The GSEs are
currently under Federal
conservatorship. The Bureau established
this category of QMs (Temporary GSE
QM loans) as a temporary measure that
is set to expire no later than January 10,
2021 or when the GSEs exit
conservatorship. In a separate proposal
released simultaneously with this
proposal, the Bureau proposes to extend
the Temporary GSE QM loan definition
to expire upon the effective date of final
amendments to the General QM loan
definition in Regulation Z (or when the
GSEs cease to operate under the
conservatorship of the FHFA, if that
happens earlier). In this present
proposed rule, the Bureau proposes the
amendments to the General QM loan
definition that are referenced in that
separate proposal. The Bureau’s
objective with these proposals is to
facilitate a smooth and orderly
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SUMMARY:
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transition away from the Temporary
GSE QM loan definition and to ensure
access to responsible, affordable
mortgage credit upon its expiration.
DATES: Comments must be received on
or before September 8, 2020.
ADDRESSES: You may submit comments,
identified by Docket No. CFPB–2020–
0020 or RIN 3170–AA98, by any of the
following methods:
• Federal eRulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Email: 2020-NPRM-ATRQMGeneralQM@cfpb.gov. Include Docket
No. CFPB–2020–0020 or RIN 3170–
AA98 in the subject line of the message.
• Mail/Hand Delivery/Courier:
Comment Intake—General QM
Amendments, Bureau of Consumer
Financial Protection, 1700 G Street NW,
Washington, DC 20552. Please note that
due to circumstances associated with
the COVID–19 pandemic, the Bureau
discourages the submission of
comments by mail, hand delivery, or
courier.
Instructions: The Bureau encourages
the early submission of comments. All
submissions should include the agency
name and docket number or Regulatory
Information Number (RIN) for this
rulemaking. Because paper mail in the
Washington, DC area and at the Bureau
is subject to delay, and in light of
difficulties associated with mail and
hand deliveries during the COVID–19
pandemic, commenters are encouraged
to submit comments electronically. In
general, all comments received will be
posted without change to https://
www.regulations.gov. In addition, once
the Bureau’s headquarters reopens,
comments will be available for public
inspection and copying at 1700 G Street
NW, Washington, DC 20552, on official
business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that
time, you can make an appointment to
inspect the documents by telephoning
202–435–9169.
All comments, including attachments
and other supporting materials, will
become part of the public record and
subject to public disclosure. Proprietary
information or sensitive personal
information, such as account numbers
or Social Security numbers, or names of
other individuals, should not be
included. Comments will not be edited
to remove any identifying or contact
information.
FOR FURTHER INFORMATION CONTACT:
Benjamin Cady or Waeiz Syed,
Counsels, or Sarita Frattaroli, David
Friend, Joan Kayagil, Mark Morelli,
Amanda Quester, Alexa Reimelt, Marta
Tanenhaus, Priscilla Walton-Fein, or
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Steven Wrone, Senior Counsels, Office
of Regulations, at 202–435–7700. If you
require this document in an alternative
electronic format, please contact CFPB_
Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Ability-to-Repay/Qualified
Mortgage Rule (ATR/QM Rule or Rule)
requires a creditor to make a reasonable,
good faith determination of a
consumer’s ability to repay a residential
mortgage loan according to its terms.
Loans that meet the Rule’s requirements
for qualified mortgages (QMs) obtain
certain protections from liability. The
Rule defines several categories of QMs.
One QM category defined in the Rule
is the General QM loan category.
General QM loans must comply with the
Rule’s prohibitions on certain loan
features, its points-and-fees limits, and
its underwriting requirements. For
General QM loans, the ratio of the
consumer’s total monthly debt to total
monthly income (DTI) ratio must not
exceed 43 percent. The Rule requires
that creditors must calculate, consider,
and verify debt and income for purposes
of determining the consumer’s DTI ratio
using the standards contained in
appendix Q of Regulation Z.
A second, temporary category of QM
loans defined in the Rule consists of
mortgages that (1) comply with the same
loan-feature prohibitions and pointsand-fees limits as General QM loans and
(2) are eligible to be purchased or
guaranteed by the GSEs while under the
conservatorship of the FHFA. This
proposal refers to these loans as
Temporary GSE QM loans, and the
provision that created this loan category
is commonly known as the GSE Patch.
Unlike for General QM loans, the Rule
does not prescribe a DTI limit for
Temporary GSE QM loans. Thus, a loan
can qualify as a Temporary GSE QM
loan even if the consumer’s DTI ratio
exceeds 43 percent, so long as the loan
is eligible to be purchased or guaranteed
by either of the GSEs. In addition, for
Temporary GSE QM loans, the Rule
does not require creditors to use
appendix Q to determine the
consumer’s income, debt, or DTI ratio.
Under the Rule, the Temporary GSE
QM loan definition expires with respect
to each GSE when that GSE exits
conservatorship or on January 10, 2021,
whichever comes first. The GSEs are
currently in conservatorship. Despite
the Bureau’s expectations when the
Rule was published in 2013, Temporary
GSE QM loan originations continue to
represent a large and persistent share of
the residential mortgage loan market. A
significant number of Temporary GSE
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QM loans would not qualify as General
QM loans under the current regulations
after the Temporary GSE QM loan
definition expires. These loans would
not qualify as General QM loans either
because the consumer’s DTI ratio is
above 43 percent or because the
creditor’s method of documenting and
verifying income or debt does not
comply with appendix Q. Although
alternative loan options, including some
other types of QM loans, would still be
available to many consumers who could
not qualify for General QM loans, the
Bureau’s analysis of available data
indicates that many loans that are
currently Temporary GSE QM loans
would cost materially more for
consumers and many would not be
made at all.
In a separate proposal (Extension
Proposal) released simultaneously with
this proposal, the Bureau proposes to
extend the Temporary GSE QM loan
definition to expire upon the effective
date of final amendments to the General
QM loan definition or when the GSEs
exit conservatorship, whichever comes
first. In this proposal, the Bureau
proposes the amendments to the
General QM loan definition that are
referenced in the Extension Proposal.
The Bureau is issuing this proposal to
amend the General QM loan definition
because it is concerned that retaining
the existing General QM loan definition
with the 43 percent DTI limit after the
Temporary GSE QM loan definition
expires would significantly reduce the
size of QM and could significantly
reduce access to responsible, affordable
credit. The Bureau is proposing a pricebased General QM loan definition to
replace the DTI-based approach because
it preliminarily concludes that a loan’s
price, as measured by comparing a
loan’s annual percentage rate (APR) to
the average prime offer rate (APOR) for
a comparable transaction, is a strong
indicator of a consumer’s ability to
repay and is a more holistic and flexible
measure of a consumer’s ability to repay
than DTI alone.
Under the proposal, a loan would
meet the General QM loan definition in
§ 1026.43(e)(2) only if the APR exceeds
APOR for a comparable transaction by
less than two percentage points as of the
date the interest rate is set. The proposal
would provide higher thresholds for
loans with smaller loan amounts and for
subordinate-lien transactions. The
proposal would retain the existing
product-feature and underwriting
requirements and limits on points and
fees. Although the proposal would
remove the 43 percent DTI limit from
the General QM loan definition, the
proposal would require that the creditor
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consider the consumer’s income or
assets, debt obligations, and DTI ratio or
residual income and verify the
consumer’s current or reasonably
expected income or assets other than the
value of the dwelling (including any
real property attached to the dwelling)
that secures the loan and the consumer’s
current debt obligations, alimony, and
child support. The proposal would
remove appendix Q. To prevent
uncertainty that may result from
appendix Q’s removal, the proposal
would clarify the requirements to
consider and verify a consumer’s
income, assets, debt obligations,
alimony, and child support. The
proposal would preserve the current
threshold separating safe harbor from
rebuttable presumption QMs, under
which a loan is a safe harbor QM if its
APR exceeds APOR for a comparable
transaction by less than 1.5 percentage
points as of the date the interest rate is
set (or by less than 3.5 percentage points
for subordinate-lien transactions).
The Bureau is proposing a price-based
approach to replace the specific DTI
limit because it is concerned that
imposing a DTI limit as a condition for
QM status under the General QM loan
definition may be overly burdensome
and complex in practice and may
unduly restrict access to credit because
it provides an incomplete picture of the
consumer’s financial capacity. In
particular, the Bureau is concerned that
conditioning QM status on a specific
DTI limit may impair access to
responsible, affordable credit for some
consumers for whom it might be
appropriate to presume ability to repay
for their loans at consummation. For the
reasons set forth below, the Bureau
preliminarily concludes that a pricebased General QM loan definition is
appropriate because a loan’s price, as
measured by comparing a loan’s APR to
APOR for a comparable transaction, is a
strong indicator of a consumer’s ability
to repay and is a more holistic and
flexible measure of a consumer’s ability
to repay than DTI alone.
In addition, although the Bureau is
proposing to remove the 43 percent DTI
limit and adopt a price-based approach
for the General QM loan definition, the
Bureau requests 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.
The Bureau proposes that the effective
date of a final rule relating to this
proposal would be six months after
publication in the Federal Register. The
revised regulations would apply to
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covered transactions for which creditors
receive an application on or after this
effective date. The Bureau tentatively
determines that a six-month period
between Federal Register publication of
a final rule and the final rule’s effective
date would give creditors enough time
to bring their systems into compliance
with the revised regulations. The
Bureau does not intend to issue a final
rule amending the General QM loan
definition early enough for it to take
effect before April 1, 2021. The Bureau
requests comment on this proposed
effective date. The Bureau specifically
seeks comment on whether there is a
day of the week or time of month that
would most facilitate implementation of
the proposed changes.
II. Background
A. Dodd-Frank Act Amendments to the
Truth in Lending Act
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank Act) amended the Truth in
Lending Act (TILA) to establish, among
other things, ability-to-repay (ATR)
requirements in connection with the
origination of most residential mortgage
loans.1 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.’’ 2 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.3
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
1 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, sections 1411–
12, 1414, 124 Stat. 1376 (2010); 15 U.S.C. 1639c.
2 15 U.S.C. 1639b(a)(2).
3 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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resources other than equity in the
dwelling or real property that secures
repayment of the loan.4 A creditor,
however, may not be certain whether its
ATR determination is reasonable in a
particular case, and it risks liability if a
court or an agency, including the
Bureau, later concludes that the ATR
determination was not reasonable.
TILA addresses this uncertainty by
defining a category of loans—called
QMs—for which a creditor ‘‘may
presume that the loan has met’’ the ATR
requirements.5 The statute generally
defines a QM to mean any residential
mortgage loan for which:
• There is no negative amortization,
interest-only payments, or balloon
payments;
• The loan term does not exceed 30
years;
• The total points and fees generally
do not exceed 3 percent of the loan
amount;
• The income and assets relied upon
for repayment are verified and
documented;
• The underwriting uses a monthly
payment based on the maximum rate
during the first five years, uses a
payment schedule that fully amortizes
the loan over the loan term, and takes
into account all mortgage-related
obligations; and
• The loan complies with any
guidelines or regulations established by
the Bureau relating to the ratio of total
monthly debt to monthly income or
alternative measures of ability to pay
regular expenses after payment of total
monthly debt.6
B. The Ability-to-Repay/Qualified
Mortgage Rule
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In January 2013, the Bureau issued a
final rule amending Regulation Z to
implement TILA’s ATR requirements
(January 2013 Final Rule).7 The January
2013 Final Rule became effective on
January 10, 2014, and the Bureau
amended it several times through 2016.8
This proposal refers to the January 2013
Final Rule and later amendments to it
collectively as the Ability-to-Repay/
Qualified Mortgage Rule, the ATR/QM
Rule, or the Rule. The ATR/QM Rule
implements the statutory ATR
provisions discussed above and defines
several categories of QM loans.9
4 15
U.S.C. 1639c(a)(3).
U.S.C. 1639c(b)(1).
6 15 U.S.C. 1639c(b)(2)(A).
7 78 FR 6408 (Jan. 30, 2013).
8 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).
9 12 CFR 1026.43(c), (e).
5 15
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1. General QM Loans
One category of QM loans defined by
the Rule consists of ‘‘General QM
loans.’’ 10 A loan is a General QM loan
if:
• The loan does not have negativeamortization, interest-only, or balloonpayment features, a term that exceeds 30
years, or points and fees that exceed
specified limits; 11
• The creditor underwrites the loan
based on a fully amortizing schedule
using the maximum rate permitted
during the first five years; 12
• The creditor considers and verifies
the consumer’s income and debt
obligations in accordance with
appendix Q; 13 and
• The consumer’s DTI ratio is no
more than 43 percent, determined in
accordance with appendix Q.14
Appendix Q contains standards for
calculating and verifying debt and
income for purposes of determining
10 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 five percent of the
credit risk of the assets collateralizing the ABS. 15
U.S.C. 78o–11. Six Federal agencies (not including
the Bureau) are tasked with implementing this
requirement. Those agencies are the Board of
Governors of the Federal Reserve System (Board),
the Office of the Comptroller of the Currency (OCC),
the Federal Deposit Insurance Corporation (FDIC),
the Securities and Exchange Commission, the
FHFA, and the U.S. Department of Housing and
Urban Development (HUD) (collectively, the QRM
agencies). Section 15G of the Securities Exchange
Act of 1934 provides that the credit risk retention
requirements shall not apply to an issuance of ABS
if all of the assets that collateralize the ABS are
QRMs. See 15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and
(B). Section 15G requires the QRM agencies to
jointly define what constitutes a QRM, taking into
consideration underwriting and product features
that historical loan performance data indicate result
in a lower risk of default. See 15 U.S.C. 78o–
11(e)(4). Section 15G also provides that the
definition of a QRM shall be ‘‘no broader than’’ the
definition of a ‘‘qualified mortgage,’’ as the term is
defined under TILA section 129C(b)(2), as amended
by the Dodd-Frank Act, and regulations adopted
thereunder. 15 U.S.C. 78o–11(e)(4)(C). In 2014, the
QRM agencies issued a final rule adopting the risk
retention requirements. 79 FR 77601 (Dec. 24,
2014). 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. 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.
11 12 CFR 1026.43(e)(2)(i)–(iii).
12 12 CFR 1026.43(e)(2)(iv).
13 12 CFR 1026.43(e)(2)(v).
14 12 CFR 1026.43(e)(2)(vi).
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whether a mortgage satisfies the 43
percent DTI limit for General QM loans.
The standards in appendix Q were
adapted from guidelines maintained by
the Federal Housing Administration
(FHA) of HUD when the January 2013
Final Rule was issued.15 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.16
2. Temporary GSE QM Loans
A second, temporary category of QM
loans defined by the Rule, Temporary
GSE QM loans, consists of mortgages
that (1) comply with the Rule’s
prohibitions on certain loan features, its
underwriting requirements, and its
limitations on points and fees; 17 and (2)
are eligible to be purchased or
guaranteed by either GSE while under
the conservatorship of the FHFA.18
Unlike for General QM loans,
Regulation Z does not prescribe a DTI
limit for Temporary GSE QM loans.
Thus, a loan can qualify as a Temporary
GSE QM loan even if the DTI ratio
exceeds 43 percent, as long as the DTI
ratio meets the applicable GSE’s DTI
requirements and other underwriting
criteria. In addition, income and debt
for such loans, and DTI ratios, generally
are verified and calculated using GSE
standards, rather than appendix Q. The
Temporary GSE QM loan category—also
known as the GSE Patch—is scheduled
to expire with respect to each GSE when
that GSE exits conservatorship or on
January 10, 2021, whichever comes
first.19
15 78 FR 6408, 6527–28 (Jan. 30, 2013) (noting
that appendix Q incorporates, with certain
modifications, the definitions and standards in
HUD Handbook 4155.1, Mortgage Credit Analysis
for Mortgage Insurance on One-to-Four-Unit
Mortgage Loans).
16 12 CFR 1026, appendix Q.
17 12 CFR 1026.43(e)(2)(i) through (iii).
18 12 CFR 1026.43(e)(4).
19 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule
created several additional categories of QM loans.
The first additional category consisted of mortgages
eligible to be insured or guaranteed (as applicable)
by HUD (FHA loans), the U.S. Department of
Veterans Affairs (VA loans), the U.S. Department of
Agriculture (USDA loans), and the Rural Housing
Service (RHS loans). 12 CFR 1026.43(e)(4)(ii)(B)-(E).
This temporary category of QM loans no longer
exists because the relevant Federal agencies have
since issued their own QM rules. See, e.g., 24 CFR
203.19 (HUD rule). Other categories of QM loans
provide more flexible standards for certain loans
originated by certain small creditors. 12 CFR
1026.43(e)(5), (f); cf. 12 CFR 1026.43(e)(6)
(applicable only to covered transactions for which
the application was received before April 1, 2016).
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In the January 2013 Final Rule, the
Bureau explained why it created the
Temporary GSE QM loan category. The
Bureau observed that it did not believe
that a 43 percent DTI ratio ‘‘represents
the outer boundary of responsible
lending’’ and acknowledged that
historically, and even after the financial
crisis, over 20 percent of mortgages
exceeded that threshold.20 The Bureau
believed, however, that, as DTI ratios
increase, ‘‘the general ability-to-repay
procedures, rather than the qualified
mortgage framework, is better suited for
consideration of all relevant factors that
go to a consumer’s ability to repay a
mortgage loan’’ and that ‘‘[o]ver the long
term . . . there will be a robust and
sizable market for prudent loans beyond
the 43 percent threshold even without
the benefit of the presumption of
compliance that applies to qualified
mortgages.’’ 21
At the same time, the Bureau noted
that the mortgage market was especially
fragile following the financial crisis, and
GSE-eligible loans and federally insured
or guaranteed loans made up a
significant majority of the market.22 The
Bureau believed that it was appropriate
to consider for a period of time that
GSE-eligible loans were originated with
an appropriate assessment of the
consumer’s ability to repay and
therefore warranted being treated as
QMs.23 The Bureau believed in 2013
that this temporary category of QM
loans would, in the near term, help to
ensure access to responsible, affordable
credit for consumers with DTI ratios
above 43 percent, as well as facilitate
compliance by creditors by promoting
the use of widely recognized, federally
related underwriting standards.24
In making the Temporary GSE QM
loan definition temporary, the Bureau
sought to ‘‘provide an adequate period
for economic, market, and regulatory
conditions to stabilize’’ and ‘‘a
reasonable transition period to the
general qualified mortgage
definition.’’ 25 The Bureau believed that
the Temporary GSE QM loan definition
would benefit consumers by preserving
access to credit while the mortgage
industry adjusted to the ATR/QM
Rule.26 The Bureau also explained that
it structured the Temporary GSE QM
loan definition to cover loans eligible to
be purchased or guaranteed by either of
the GSEs—regardless of whether the
loans are actually purchased or
guaranteed—to leave room for non-GSE
private investors to return to the market
and secure the same legal protections as
the GSEs.27 The Bureau believed that, as
the market recovered, the GSEs and the
Federal agencies would be able to
reduce their market presence, the
percentage of Temporary GSE QM loans
would decrease, and the market would
shift toward General QM loans and nonQM loans above a 43 percent DTI
ratio.28 The Bureau’s view was that a
shift towards non-QM loans could be
supported by the non-GSE private
market—i.e., by institutions holding
such loans in portfolio, selling them in
whole, or securitizing them in a
rejuvenated private-label securities
(PLS) market. The Bureau noted that,
pursuant to its statutory obligations
under the Dodd-Frank Act, it would
assess the impact of the ATR/QM Rule
five years after the Rule’s effective date,
and the assessment would provide an
opportunity to analyze the Temporary
GSE QM loan definition.29
3. Presumption of Compliance for QM
Loans
In the January 2013 Final Rule, the
Bureau considered whether QM loans
should receive a conclusive
presumption (i.e., a safe harbor) or a
rebuttable presumption of compliance
with the ATR requirements. The Bureau
concluded that the statute is ambiguous
as to whether a creditor originating a
QM loan receives a safe harbor or a
rebuttable presumption that it has
complied with the ATR requirements.30
The Bureau noted that its analysis of the
statutory construction and policy
implications demonstrated that there are
sound reasons for adopting either
interpretation.31 The Bureau concluded
that the statutory language does not
mandate either interpretation and that
the presumptions should be tailored to
promote the policy goals of the statute.32
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.’’ 33
Under the Rule, a creditor that makes
a QM loan is protected from liability
presumptively or conclusively,
depending on whether the loan is
20 78
27 Id.
21 Id.
FR 6408, 6527 (Jan. 30, 2013).
at 6527–28.
22 Id. at 6533–34.
23 Id. at 6534.
24 Id. at 6533.
25 Id. at 6534.
26 Id. at 6536.
28 Id.
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at 6534.
29 Id.
30 Id.
at 6511.
at 6507.
32 Id. at 6511.
33 Id. at 6514.
31 Id.
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‘‘higher priced.’’ The Rule generally
defines a ‘‘higher-priced’’ loan to mean
a first-lien mortgage with an APR that
exceeded APOR for a comparable
transaction as of the date the interest
rate was set by 1.5 or more percentage
points; or a subordinate-lien mortgage
with an APR that exceeded APOR for a
comparable transaction as of the date
the interest rate was set by 3.5 or more
percentage points.34 A creditor that
makes a QM loan that is not ‘‘higher
priced’’ is entitled to a conclusive
presumption that it has complied with
the Rule—i.e., the creditor receives a
safe harbor from liability.35 A creditor
that makes a loan that meets the
standards for a QM loan but is ‘‘higher
priced’’ is entitled to a rebuttable
presumption that it has complied with
the Rule.36
The Bureau explained in the January
2013 Final Rule why it was adopting
different presumptions of compliance
based on the pricing of QMs.37 The
Bureau noted that the line it was
drawing is one that has long been
recognized as a rule of thumb to
separate prime loans from subprime
loans.38 The Bureau noted that loan
pricing is calibrated to the risk of the
loan and that the historical performance
of prime and subprime loans indicates
greater risk for subprime loans.39 The
Bureau also noted that consumers taking
out subprime loans tend to be less
sophisticated and have fewer options
and that the most abuses prior to the
financial crisis occurred in the subprime
market.40 The Bureau concluded that
these factors warrant imposing
heightened standards for higher-priced
loans.41 For prime loans, however, the
Bureau found that lower rates are
indicative of ability to repay and noted
that prime loans have performed
significantly better than subprime
loans.42 The Bureau concluded that if a
loan met the product and underwriting
requirements for QM and was not a
higher-priced loan, there are sufficient
grounds for concluding that the creditor
satisfied the ATR requirements.43 The
Bureau noted that the conclusive
presumption may reduce uncertainty
and litigation risk and may promote
enhanced competition in the prime
34 12
CFR 1026.43(b)(4).
CFR 1026.43(e)(1)(i).
36 12 CFR 1026.43(e)(1)(ii).
37 78 FR 6408 at 6506, 6510–14.
38 Id. at 6408.
39 Id. at 6511.
40 Id.
41 Id.
42 Id.
43 Id.
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market.44 The Bureau also noted that the
litigation risk for rebuttable
presumption QMs likely would be quite
modest and would have a limited
impact on access to credit.45
The Bureau also noted in the January
2013 Final Rule that policymakers have
long relied on pricing to determine
which loans should be subject to
additional regulatory requirements.46
That history of reliance on pricing
continues to provide support for a pricebased approach to the General QM loan
definition. For example, in 1994
Congress amended TILA by enacting the
Home Ownership and Equity Protection
Act (HOEPA) as part of the Riegle
Community Development and
Regulatory Improvement Act of 1994.47
HOEPA was enacted as an amendment
to TILA to address abusive practices in
refinancing and home-equity mortgage
loans with high interest rates or high
fees.48 The statute applied generally to
closed-end mortgage credit but excluded
purchase money mortgage loans and
reverse mortgages. Coverage was
triggered if a loan’s APR exceeded
comparable Treasury securities by
specified thresholds for particular loan
types, or if points and fees exceeded
eight percent of the total loan amount or
a dollar threshold.49 For high-cost loans
meeting either of those thresholds,
HOEPA required creditors to provide
special pre-closing disclosures,
restricted prepayment penalties and
certain other loan terms, and regulated
various creditor practices, such as
extending credit without regard to a
consumer’s ability to repay the loan.
HOEPA also created special substantive
protections for high-cost mortgages,
such as prohibiting a creditor from
engaging in a pattern or practice of
extending a high-cost mortgage to a
consumer based on the consumer’s
collateral without regard to the
consumer’s repayment ability, including
the consumer’s current and expected
income, current obligations, and
employment.50 The Board implemented
44 Id.
45 Id.
at 6511–12.
at 6413–14, 6510–11.
47 Riegle Community Development and
Regulatory Improvement Act, Public Law 103–325,
108 Stat. 2160 (1994).
48 As originally enacted, HOEPA defined a class
of ‘‘high-cost mortgages,’’ which were generally
closed-end home-equity loans (excluding homepurchase loans) with APRs or total points and fees
exceeding prescribed thresholds. Mortgages covered
by HOEPA have been referred to as ‘‘HOEPA
loans,’’ ‘‘Section 32 loans,’’ or ‘‘high-cost
mortgages.’’
49 The Dodd-Frank Act adjusted the baseline for
the APR comparison, lowered the points-and-fees
threshold, and added a prepayment trigger.
50 TILA section 129(h); 15 U.S.C. 1639(h). In
addition to the disclosures and limitations specified
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the HOEPA amendments at §§ 226.31,
226.32, and 226.33 51 of Regulation Z.52
In 2001, the Board issued rules
expanding HOEPA’s protections to more
loans by revising the APR threshold for
first-lien mortgage loans and revising
the ATR provisions to provide for a
presumption of a violation of the rule if
the creditor engages in a pattern or
practice of making high-cost mortgages
without verifying and documenting the
consumer’s repayment ability.
In 2008, the Board exercised its
authority under HOEPA to extend
certain consumer protections
concerning a consumer’s ability to repay
and prepayment penalties to a new
category of ‘‘higher-priced mortgage
loans’’ (HPMLs) 53 with APRs that are
lower than those prescribed for highcost loans but that nevertheless exceed
the APOR by prescribed amounts. This
new category of loans was designed to
include subprime credit, including
subprime purchase money mortgage
loans. Specifically, the Board exercised
its authority to revise HOEPA’s
restrictions on high-cost loans based on
a conclusion that the revisions were
necessary to prevent unfair and
deceptive acts or practices in
connection with mortgage loans.54 The
Board concluded that a prohibition on
making individual loans without regard
for repayment ability was necessary to
ensure a remedy for consumers who are
given unaffordable loans and to deter
irresponsible lending, which injures
individual consumers. The 2008
HOEPA Final Rule provided a
presumption of compliance with the
higher-priced mortgage ability-to-repay
requirements if the creditor follows
certain procedures regarding
underwriting the loan payment,
assessing the DTI ratio or residual
income, and limiting the features of the
loan, in addition to following certain
in the statute, HOEPA expanded the Board’s
rulemaking authority, among other things, to
prohibit acts or practices the Board found to be
unfair and deceptive in connection with mortgage
loans.
51 Subsequently renumbered as sections 1026.31,
1026.32, and 1026.33 of Regulation Z.
52 See 60 FR 15463 (Mar. 24, 1995).
53 Under the Board’s 2008 HOEPA Final Rule, a
higher-priced mortgage loan is a consumer credit
transaction secured by the consumer’s principal
dwelling with an APR that exceeds APOR for a
comparable transaction, as of the date the interest
rate is set, by 1.5 or more percentage points for
loans secured by a first lien on the dwelling, or by
3.5 or more percentage points for loans secured by
a subordinate lien on the dwelling. 73 FR 44522
(July 30, 2008) (2008 HOEPA Final Rule). The
definition of a ‘‘higher-priced mortgage loan’’
includes practically all ‘‘high-cost mortgages’’
because the latter transactions are determined by
higher loan pricing threshold tests. See 12 CFR
226.35(a)(1).
54 73 FR 44522 (July 30, 2008).
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procedures mandated for all creditors.55
However, the 2008 HOEPA Final Rule
made clear that even if the creditor
follows the required and optional
criteria, the creditor obtained a
presumption (not a safe harbor) of
compliance with the repayment ability
requirement. The consumer therefore
could still rebut or overcome that
presumption by showing that, despite
following the required and optional
procedures, the creditor nonetheless
disregarded the consumer’s ability the
loan.
C. The Bureau’s Assessment of the
Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank
Act requires the Bureau to assess each
of its significant rules and orders and to
publish a report of each assessment
within five years of the effective date of
the rule or order.56 In June 2017, the
Bureau published a request for
information in connection with its
assessment of the ATR/QM Rule
(Assessment RFI).57 These comments
are summarized in general terms in part
III below.
In January 2019, the Bureau published
its ATR/QM Rule Assessment Report.58
The Report included findings about the
effects of the ATR/QM Rule on the
mortgage market generally, as well as
specific findings about Temporary GSE
QM loan originations.
The Report found that loans with
higher DTI levels have been associated
with higher levels of ‘‘early
delinquency’’ (i.e., delinquency within
two years of origination), which can
serve as a proxy for measuring
consumer repayment ability at
consummation across a wide pool of
loans.59 The Report also found that the
Rule did not eliminate access to credit
for high-DTI consumers—i.e.,
consumers with DTI ratios above 43
percent—who qualify for loans eligible
for purchase or guarantee by either of
the GSEs, that is, Temporary GSE QM
loans.60 On the other hand, based on
application-level data obtained from
nine large lenders, the Report found that
the Rule eliminated between 63 and 70
percent of high-DTI home purchase
55 See
12 CFR 1026.34(a)(4)(iii), (iv).
U.S.C. 5512(d).
57 82 FR 25246 (June 1, 2017).
58 See generally Bureau of Consumer Fin. Prot.,
Ability to Repay and Qualified Mortgage
Assessment Report (Jan. 2019) (Assessment Report),
https://files.consumerfinance.gov/f/documents/
cfpb_ability-to-repay-qualified-mortgage_
assessment-report.pdf.
59 See, e.g., id. at 83–84, 100–05.
60 See, e.g., id. at 10, 194–96.
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loans that were not Temporary GSE QM
loans.61
One main finding about Temporary
GSE QM loans was that such loans
continued to represent a ‘‘large and
persistent’’ share of originations in the
conforming segment of the mortgage
market.62 As discussed, the GSEs’ share
of the conventional, conforming
purchase-mortgage market was large
before the ATR/QM Rule, and the
Assessment found a small increase in
that share since the Rule’s effective date,
reaching 71 percent in 2017.63 The
Assessment Report noted that, at least
for loans intended for sale in the
secondary market, creditors generally
offer a Temporary GSE QM loan even
when a General QM loan could be
originated.64
The continued prevalence of
Temporary GSE QM loan originations is
contrary to the Bureau’s expectation at
the time it issued the ATR/QM Rule in
2013.65 The Assessment Report
discussed several possible reasons for
the continued prevalence of Temporary
GSE QM loan originations. The Report
first highlighted commenters’ concerns
with the perceived lack of clarity in
appendix Q and found that such
concerns ‘‘may have contributed to
investors’—and at least derivatively,
creditors’—preference’’ for Temporary
GSE QM loans instead of originating
loans under the General QM loan
definition.66 In addition, the Bureau has
not revised appendix Q since 2013,
while other standards for calculating
and verifying debt and income have
been updated more frequently.67 ANPR
commenters also expressed concern
with appendix Q and stated that the
Temporary GSE QM loan definition has
benefited creditors and consumers by
enabling creditors to originate QMs
without having to use appendix Q.
The Assessment Report noted that a
second possible reason for the
continued prevalence of Temporary GSE
QM loans is that the GSEs were able to
accommodate the demand for mortgages
above the General QM loan definition’s
DTI limit of 43 percent as the DTI ratio
distribution in the market shifted
upward.68 According to the Assessment
61 See,
e.g., id. at 10–11, 117, 131–47.
at 188. Because the Temporary GSE QM
loan definition generally affects only loans that
conform to the GSEs’ guidelines, the Assessment
Report’s discussion of the Temporary GSE QM loan
definition focused on the conforming segment of
the market, not on non-conforming (e.g., jumbo)
loans.
63 Id. at 191.
64 Id. at 192.
65 Id. at 13, 190, 238.
66 Id. at 193.
67 Id. at 193–94.
68 Id. at 194.
Report, in the years since the ATR/QM
Rule took effect, house prices have
increased and consumers hold more
mortgage and other debt (including
student loan debt), all of which have
caused the DTI ratio distribution to shift
upward.69 The Assessment Report noted
that the share of GSE home purchase
loans with DTI ratios above 43 percent
has increased since the ATR/QM Rule
took effect in 2014.70 The available data
suggest that such high-DTI lending has
declined in the non-GSE market relative
to the GSE market.71 The non-GSE
market has constricted even with
respect to highly qualified consumers;
those with higher incomes and higher
credit scores are representing a greater
share of denials.72
The Assessment Report found that a
third possible reason for the persistence
of Temporary GSE QM loans is the
structure of the secondary market.73 If
creditors adhere to the GSEs’ guidelines,
they gain access to a robust, highly
liquid secondary market.74 In contrast,
while private market securitizations
have grown somewhat in recent years,
their volume is still a fraction of their
pre-crisis levels.75 There were less than
$20 billion in new origination PLS
issuances in 2017, compared with $1
trillion in 2005,76 and only 21 percent
of new origination PLS issuances in
2017 were non-QM issuances.77 To the
extent that private securitizations have
occurred since the ATR/QM Rule took
effect in 2014, the majority of new
origination PLS issuances have
consisted of prime jumbo loans made to
consumers with strong credit
characteristics, and these securities have
a low share of non-QM loans.78 The
Assessment Report notes that the
Temporary GSE QM loan definition may
itself be inhibiting the growth of the
non-QM market.79 However, the Report
also notes that it is possible that this
market might not exist even with a
narrower Temporary GSE QM loan
definition, if consumers were unwilling
to pay the premium charged to cover the
potential litigation risk associated with
non-QMs, which do not have a
presumption of compliance with the
ATR requirements, or if creditors were
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70 Id.
at 194–95.
at 119–20.
72 Id. at 153.
73 Id. at 196.
74 Id.
75 Id.
76 Id.
77 Id. at 197.
78 Id. at 196.
79 Id. at 205.
71 Id.
Fmt 4701
unwilling or lack the funding to make
the loans.80
The Bureau expects that each of these
features of the mortgage market that
concentrate lending within the
Temporary GSE QM loan definition will
largely persist through the current
January 10, 2021 sunset date.
D. Effects of the COVID–19 Pandemic on
Mortgage Markets
The COVID–19 pandemic has had a
significant effect on the U.S. economy.
Economic activity has contracted, some
businesses have partially or completely
closed, and millions of workers have
become unemployed. The pandemic has
also affected mortgage markets and has
resulted in a contraction of mortgage
credit availability for many consumers,
including those that would be
dependent on the non-QM market for
financing. The pandemic’s impact on
both the secondary market for new
originations and on the servicing of
existing mortgages has contributed to
this contraction, as described below.
1. Secondary Market Impacts and
Implications for Mortgage Origination
Markets
The economic disruptions associated
with the COVID–19 pandemic have
restricted the flow of credit in the U.S.
economy, including the mortgage
market. During periods of economic
distress, many investors seek to
purchase safer instruments and as
tensions and uncertainty rose in midMarch of 2020, investors moved rapidly
towards cash and government
securities.81 Indeed, the yield on the 10year Treasury note, which moves in the
opposite direction as the note’s price,
declined while mortgage rates increased
between February 2020 and March
2020.82 This widening spread was
exacerbated by a large supply of
mortgage-backed securities (MBS)
entering the market, as investors in MBS
sold large portfolios of agency MBS.83
As a result, in March of 2020, the lack
of investor demand to purchase
mortgages made it difficult for creditors
to originate loans, as many creditors rely
on the ability to profitably sell loans in
80 Id.
81 The Quarterly CARES Act Report to Congress:
Hearing Before the S. Comm. on Banking, Housing,
and Urban Affairs, 116th Cong. 2–3 (2020)
(statement of Jerome H. Powell, Chairman, Board of
Governors of the Federal Reserve System).
82 Laurie Goodman et al., Urban Institute,
Housing Finance at a Glance, Monthly Chartbook,
(Mar. 26, 2020), https://www.urban.org/research/
publication/housing-finance-glance-monthlychartbook-march-2020.
83 Agency MBS are backed by loans guaranteed by
Fannie Mae, Freddie Mac, and the Government
National Mortgage Association (Ginnie Mae).
69 Id.
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the secondary market to generate the
liquidity to originate new loans. This
resulted in mortgages becoming more
expensive for both homebuyers and
homeowners looking to refinance.
On March 15, 2020, the Board
announced that it would increase its
holdings of agency MBS by at least $200
billion.84 On March 23, 2020, the Board
announced that it would remove this
limit and purchase agency MBS ‘‘in the
amounts needed to support smooth
market functioning and effective
transmission of monetary policy to
broader financial conditions and the
economy.’’ 85 The Board took these
actions to stabilize the secondary market
and support the continued flow of
mortgage credit. With these purchases,
market conditions have improved
substantially, and the Board has since
slowed its pace of purchases.86 This has
helped to stabilize mortgage rates,
resulting in a decline in mortgage rates
since the Board’s intervention.
Non-agency MBS 87 are generally
perceived by investors as riskier than
agency MBS, and non-QM lending has
declined as a result. Issuance of nonagency MBS declined by 8.2 percent in
the first quarter of 2020, with nearly all
the transactions completed in January
and February, before the COVID–19
pandemic began to affect the economy
significantly.88 Nearly all major non-QM
creditors ceased making loans in March
and April. In May of 2020, issuers of
non-agency MBS began to test the
market with deals collateralized by nonQM loans largely originated prior to the
crisis. Moreover, several non-QM
creditors—which largely depend on the
ability to sell loans in the secondary
market in order to fund new loans—
have begun to resume originations,
albeit with a tighter credit box.89 Prime
84 Press Release, Bd. of Governors of the Fed.
Reserve Sys., Federal Reserve issues FOMC
statement (Mar. 15, 2020), https://
www.federalreserve.gov/newsevents/pressreleases/
monetary20200315a.htm.
85 Press Release, Bd. of Governors of the Fed.
Reserve Sys., Federal Reserve announces extensive
new measures to support the economy (Mar. 23,
2020), https://www.federalreserve.gov/newsevents/
pressreleases/monetary20200323b.htm.
86 The Quarterly CARES Act Report to Congress:
Hearing Before the S. Comm. on Banking, Housing,
and Urban Affairs, 116th Cong. 3 (2020) (statement
of Jerome H. Powell, Chairman, Board of Governors
of the Federal Reserve System).
87 Non-agency MBS are not backed by loans
guaranteed by Fannie Mae, Freddie Mac or the
Ginnie Mae. This includes securities collateralized
by non-QM loans.
88 Brandon Ivey, Non-Agency MBS Issuance
Slowed in First Quarter (2020), https://
www.insidemortgagefinance.com/articles/217623non-agency-mbs-issuance-slowed-in-first-quarter.
89 Brandon Ivey, Non-Agency Mortgage
Securitization Opening Up After Pause (2020),
https://www.insidemortgagefinance.com/articles/
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jumbo financing dropped nearly 22
percent in the first quarter of 2020.
Banks increased interest rates and
narrowed the product offering to
consumers with pristine credit profiles,
as these loans must be held on portfolio
when the secondary market for nonagency MBS contracts.90
2. Servicing Market Impacts and
Implications for Origination Markets
Anticipating that a number of
homeowners would struggle to pay their
mortgages due to the pandemic and
related economic impacts, Congress
passed and the President signed the
Coronavirus Aid, Relief, and Economic
Security Act (the CARES Act) in March
2020. The CARES Act provides
additional protections for borrowers
whose mortgages are purchased or
securitized by a GSE and certain
federally-backed mortgages.91 The
CARES Act mandates a 60-day
foreclosure moratorium for such
mortgages. The CARES Act also allows
borrowers 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.
Following the passage of the CARES
Act, some mortgage servicers remain
obligated to make some principal and
interest payments to investors in GSE
and Ginnie Mae securities, even if
consumers are not making payments.92
Servicers also remain obligated to make
escrowed real estate tax and insurance
payments to local taxing authorities and
insurance companies. Significant
liquidity is needed to fulfill servicer
obligations to security holders. While
servicers are required to hold liquid
reserves to cover anticipated advances,
significantly higher-than-expected
forbearance rates over an extended
period of time may lead to liquidity
shortages particularly among many nonbank servicers. According to a weekly
218034-non-agency-mortgage-securitizationopening-up-after-pause.
90 Brandon Ivey, Jumbo Originations Drop Nearly
22% in First Quarter (2020) https://
www.insidemortgagefinance.com/articles/218028jumbo-originations-drop-nearly-22-in-first-quarter.
91 Coronavirus Aid, Relief, and Economic
Security Act, Public Law 116–136 (2020). (Includes
loans backed by HUD, the U.S. Department of the
Agriculture, the U.S. Department of Veterans Affairs
(VA), Fannie Mae, and Freddie Mac).
92 The GSEs typically repurchase loans out of the
trust after they fall 120 days delinquent, after which
the servicer is no longer required to advance
principal and interest, but Ginnie Mae requires
servicers to advance principal and interest until the
default is resolved. On April 21, 2020, the FHFA
confirmed that servicers of GSE loans will only be
required to advance four months of mortgage
payments, regardless of whether the GSEs
repurchase the loans from the trust after 120 days
of delinquency.
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survey from the Mortgage Bankers
Association, from March 2, 2020 to June
7, 2020, the total number of loans in
forbearance grew from 0.25 percent to
8.55 percent, with Ginnie Mae loans
having the largest growth from 0.19
percent to 11.83 percent.93
To address the anticipated liquidity
shortage, on April 10, 2020, Ginnie Mae
released guidance on a Pass-Through
Assistance Program whereby Ginnie
Mae will provide financial assistance at
a fixed interest rate to servicers facing
a principal and interest shortfall as a
last resort. On April 7, 2020, Ginnie Mae
also announced approval of a servicing
advance financing facility, whereby
mortgage servicing rights are securitized
and sold to private investors. This
change may alleviate some of the
liquidity pressures that may cause a
servicer to draw on the Pass-Through
Assistance Program.
Because many mortgage servicers also
originate the loans they service, many
creditors have responded to the risk of
elevated forbearances and higher-thanexpected monthly advances by
imposing additional underwriting
standards for new originations. These
new underwriting standards include
more stringent requirements for nonQM, jumbo, and government loans.94
For example, one major bank
announced on April 13, 2020, that it
would require prospective home
purchasers to have a minimum 700
FICO score and 20 percent down
payment. By lending only to consumers
with high credit scores, lower DTI
ratios, or significant liquid reserves,
creditors are managing their risk by
reducing the likelihood that a newlyoriginated loan will require a
forbearance plan.
Moreover, several large warehouse
providers—i.e., creditors that provide
financing to mortgage originators and
servicers—have restricted the ability of
non-banks to fund loans on their
warehouse line by prohibiting the
funding of loans to consumers with
lower credit scores. These types of
restrictions mitigate the warehouse
lender’s exposure in the event a nonbank fails or is unable to sell the loan
prior to the consumer requesting a
forbearance.95
93 Press Release, Mortgage Banker Association,
Share of Mortgage Loans in Forbearance Increases
to 8.55%, (June 15, 2020), https://www.mba.org/
2020-press-releases/june/share-of-mortgage-loansin-forbearance-increases-to-855.
94 Maria Volkova, FHA/VA Lenders Raise Credit
Score Requirements (2020), https://
www.insidemortgagefinance.com/articles/217636fhava-lenders-raise-fico-credit-score-requirements.
95 On April 22, 2020, the FHFA announced the
GSEs would be permitted to purchase certain loans
whereby the borrower requested a forbearance prior
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As of mid-June, historically low
interest rates combined with a leveling
off in forbearance rates have resulted in
an increase in refinance activity that has
been primarily concentrated in the
agency sector, helping to mitigate some
of the servicing liquidity concerns.
However, it is unclear how quickly nonbanks will return to the non-QM market
even after the mortgage market in
general recovers.
III. The Rulemaking Process
The Bureau has solicited and received
substantial public and stakeholder input
on issues related to this proposed rule.
In addition to the Bureau’s discussions
with and communications from industry
stakeholders, consumer advocates, other
Federal agencies,96 and members of
Congress, the Bureau issued requests for
information (RFIs) in 2017 and 2018 and
in July 2019 issued an advance notice of
proposed rulemaking regarding the
ATR/QM Rule (ANPR). The input from
these RFIs and from the ANPR is briefly
summarized below.
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A. The Requests for Information
In June 2017, the Bureau published a
request for information in connection
with the Assessment Report
(Assessment RFI).97 In response to the
Assessment RFI, the Bureau received
approximately 480 comments from
creditors, industry groups, consumer
advocacy groups, and individuals.98
The comments addressed a variety of
topics, including the General QM loan
definition and the 43 percent DTI limit;
perceived problems with, and potential
changes and alternatives to, appendix Q;
and how the Bureau should address the
expiration of the Temporary GSE QM
loan definition. The comments
expressed a range of ideas for
addressing the expiration of the
Temporary GSE QM loan definition,
from making the definition permanent,
to applying the definition to other
mortgage products, to extending it for
various periods of time, or some
combination of those suggestions. Other
comments stated that the Temporary
GSE QM loan definition should be
eliminated or permitted to expire.
Beginning in January 2018, the
Bureau issued a general call for
evidence seeking comment on its
to the sale of the loan for a limited period of time
and at a higher cost.
96 The Bureau has consulted with agencies
including the FHFA, the Board, FHA, the FDIC, the
OCC, the Federal Trade Commission, the National
Credit Union Administration, and the Department
of the Treasury.
97 82 FR 25246 (June 1, 2017).
98 See Assessment Report, supra note 58,
appendix B (summarizing comments received in
response to the Assessment RFI).
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enforcement, supervision, rulemaking,
market monitoring, and financial
education activities.99 As part of the call
for evidence, the Bureau published
requests for information relating to,
among other things, the Bureau’s
rulemaking process,100 the Bureau’s
adopted regulations and new
rulemaking authorities,101 and the
Bureau’s inherited regulations and
inherited rulemaking authorities.102 In
response to the call for evidence, the
Bureau received comments on the ATR/
QM Rule from stakeholders, including
consumer advocacy groups and industry
groups. The comments addressed a
variety of topics, including the General
QM loan definition, appendix Q, and
the Temporary GSE QM loan definition.
The comments also raised concerns
about, among other things, the risks of
allowing the Temporary GSE QM loan
definition to expire without any changes
to the General QM loan definition or
appendix Q. The concerns raised in
these comments were similar to those
raised in response to the Assessment
RFI, discussed above.
B. The Advance Notice of Proposed
Rulemaking
On July 25, 2019, the Bureau issued
an advance notice of proposed
rulemaking regarding the ATR/QM Rule
(ANPR). The ANPR stated the Bureau’s
tentative plans to allow the Temporary
GSE QM loan definition to expire in
January 2021 or after a short extension,
if necessary, to facilitate a smooth and
orderly transition away from the
Temporary GSE QM loan definition.
The Bureau also stated that it was
considering whether to propose
revisions to the General QM loan
definition in light of the potential
expiration of the Temporary GSE QM
loan definition and requested comments
on several topics related to the General
QM loan definition. These topics
included: (1) Whether and how the
Bureau should revise the DTI limit in
the General QM loan definition; (2)
whether the Bureau should supplement
or replace the DTI limit with another
method for directly measuring a
consumer’s personal finances; (3)
whether the Bureau should revise
appendix Q or replace it with other
standards for calculating and verifying a
consumer’s debt and income; and (4)
whether, instead of a DTI limit, the
99 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).
100 83 FR 10437 (Mar. 9, 2018).
101 83 FR 12286 (Mar. 21, 2018).
102 83 FR 12881 (Mar. 26, 2018).
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Bureau should adopt standards that do
not directly measure a consumer’s
personal finances.103 The Bureau
requested comment on how much time
industry would need to change its
practices in response to any changes the
Bureau makes to the General QM loan
definition.104 The Bureau received 85
comments on the ANPR from businesses
in the mortgage industry (including
creditors), consumer advocacy groups,
elected officials, individuals, and
research centers.
1. Direct Measures of a Consumer’s
Personal Finances
Commenters largely supported
moving away from using the 43 percent
DTI limit as a stand-alone General QM
underwriting criterion. While a few
commenters supported maintaining the
current General QM loan definition’s 43
percent DTI limit as a stand-alone
criterion along with clarifying revisions
to appendix Q, the large majority of
commenters—representing the mortgage
industry, consumer advocacy groups,
and research centers—supported either
eliminating a DTI limit, replacing it
with other methods of measuring a
consumer’s ability to repay, such as
cash flow underwriting or residual
income, or supplementing it with
additional compensating factors. These
commenters asserted that, as a standalone factor, DTI has limited
predictiveness of a consumer’s ability to
repay and has an adverse impact on
responsible access to credit for low-tomoderate income and minority
homeowners.
Many commenters suggested the
Bureau consider replacing DTI with an
alternative measure of a consumer’s
ability to repay, such as residual income
or cash flow underwriting. While some
commenters indicated these alternative
measures are more accurate predictors
of ability to repay, others suggested the
Bureau conduct additional studies of
these alternative measures and the
effectiveness of existing standards, such
as the VA’s residual income test.
Other commenters suggested the
Bureau promulgate a General QM loan
definition that allows certain
compensating factors to supplement a
specific DTI limit. Under this approach,
the rule would set a specific DTI limit
(e.g., 43 percent) but would permit loans
with higher DTI ratios to be originated
as QMs if the creditor determined that
103 84
FR 37155, 37155, 37160–62 (July 31, 2019).
Bureau stated that if the amount of time
industry would need to change its practices in
response to the rule depends on how the Bureau
revises the General QM loan definition, the Bureau
requested time estimates based on alternative
possible definitions.
104 The
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certain compensating factors were
present. Commenters identified several
potential compensating factors,
including cash reserves or past payment
performance history. Advocates for this
approach pointed to the GSEs’
underwriting standards, which permit
loans with DTI ratios between 43 and 50
percent if compensating factors are
present, as evidence that higher DTI
loans with appropriate consideration of
compensating factors can result in
affordable loans. Some of the
commenters suggested the current
General QM loan definition’s 43 percent
DTI limit could be responsibly
increased. Some commenters
recommended that the Bureau
incorporate compensating factors into
the General QM loan definition but also
adopt an overall DTI limit above which
loans could not be originated as General
QMs, regardless of any compensating
factors. Under this approach, similar to
the GSEs’ current underwriting
standards, creditors could originate
loans under the General QM loan
definition with DTI ratios under a
certain threshold (e.g., 43 percent)
without compensating factors, could
originate loans under the General QM
loan definition with DTI ratios between
that threshold and a higher threshold
(e.g., 50 percent) if the creditor
identifies certain compensating factors,
but could not originate loans under the
General QM loan definition with DTI
ratios above the higher threshold.
The Bureau also solicited comment on
whether the rule should retain appendix
Q as the standard for calculating and
verifying debt and income if the rule
retains a direct measure of a consumer’s
personal finances for General QM.
Nearly all commenters agreed that
appendix Q in its existing form is
insufficient—specifically, that the
requirements lack clarity in certain
areas, which leaves creditors uncertain
of the QM status of their loans.
Commenters also criticized appendix Q
for being overly prescriptive and
outdated in other areas and therefore
lacking the flexibility to adapt to
changing market conditions. Proponents
of eliminating the DTI limit entirely
stated that appendix Q could be
eliminated without replacement and
that the Bureau could instead publish
supervisory guidance or best practices
to assist creditors in satisfying the ATR
requirements. Other commenters
suggested that the rule supplement
appendix Q or replace it with
reasonable alternatives that allow for
more flexibility, such as the GSE or FHA
standards for verifying income and debt.
Although most commenters advocated
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for elimination of appendix Q, the
commenters that advocated for retaining
appendix Q generally suggested the
Bureau should revise appendix Q to
modernize the standards and ease
industry compliance.
2. Alternatives to Direct Measures of a
Consumer’s Personal Finances
Many commenters argued that there
are alternatives that are more predictive
of loan performance and a consumer’s
ability to repay than stand-alone direct
measures of a consumer’s personal
finances such as DTI or residual income.
Most commenters noting these
alternatives advocated for eliminating
the DTI limit entirely and suggested that
loan product features and loan pricing
should serve as the primary factors that
determine a loan’s QM status.
Commenters that opposed incorporating
alternatives to direct measures of a
consumer’s personal finances into the
General QM loan definition generally
argued that a creditor’s ATR
determination is separate and distinct
from a creditor’s decision on whether to
originate a loan. For example, they
argued that because creditors consider
factors unrelated to ability to repay in
determining their cumulative loss
exposure—such as the amount of equity
in a property—creditors can originate
loans that may not be affordable for
consumers in the long-term.
Commenters cited asset-based lending
prior to the crisis, when some creditors
originated unaffordable loans with the
intention of refinancing the loan prior to
default or otherwise believed they were
protected from loss in the event of
default due to the consumer’s equity in
the property. Commenters critical of
price-based approaches to the General
QM loan definition also stated that loan
pricing includes a wide variety of
factors unrelated to credit quality, such
as the value of the mortgage servicing
rights. These commenters also raised
concerns about the pro-cyclical nature
of loan pricing. They argued that
mortgage interest rate spreads tend to
contract during economic expansions,
such that a price-based approach to the
General QM loan definition could grant
QM status to loans that exceed
consumers’ ability to repay and increase
housing prices. In contrast, they claimed
that mortgage interest rate spreads tend
to expand during economic
contractions, inhibiting access to credit.
Commenters critical of price-based
approaches also raised concerns that
these approaches are vulnerable to
lender manipulation.
Most commenters that advocated for
removing the DTI limit entirely from the
General QM loan definition suggested
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the existing General QM protections are
sufficient—including the prohibited
product features, the points-and-fees
cap, and the ATR requirements to
consider and verify a consumer’s debt,
income or assets, DTI, or residual
income. They argued that the rule
should continue to rely on the interest
rate spread between the APR and the
APOR to distinguish those QM loans
eligible for a safe harbor from those
eligible for a rebuttable presumption of
compliance. Proponents of this
approach argued that creditors use a
wide variety of factors in the lending
decision and consumers with higherrisk lending attributes receive higher
interest rates to compensate creditors
and investors for the added risk.
Accordingly, these commenters argued
that the APR spread above the
benchmark APOR is more predictive of
the general creditworthiness of a loan
and a consumer’s ability to repay than
stand-alone measures such as DTI.
While some commenters suggested that
the rule should retain the existing price
threshold separating safe harbor QM
loans from rebuttable presumption QM
loans, which is 1.5 percentage points
above APOR for most loans, others
suggested that it would be appropriate
to increase the threshold. Other
commenters suggested there could be an
additional pricing threshold, above
which loans would be designated as
non-QM.
Commenters also provided input on
the distinction between a safe harbor
presumption of compliance and a
rebuttable presumption of compliance
with the ATR requirements. While
commenters offered different views
about whether 1.5 percentage points
over APOR is appropriate for
distinguishing between safe harbor and
rebuttable presumption QMs, or if it
should be increased, most commenters
advocated for maintaining a safe harbor.
However, several consumer advocacy
groups suggested all QM loans should
be subject to a rebuttable presumption
of compliance. Several commenters
noted that the 1.5 percentage point over
APOR threshold would
disproportionately prevent smaller
loans and loans for manufactured
housing from being originated as QMs.
They noted that creditors typically
charge more to recover fixed costs on
small loans than on larger loans with
equivalent risk attributes.
Some commenters advocated for an
approach whereby the QM
determination would be based primarily
on the likelihood of default or loss given
default as determined by an
underwriting model. One commenter
recommended that QM status be
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determined by expected default rates in
stressed economic conditions, given
certain origination characteristics. Other
commenters suggested a Bureauapproved automated underwriting
model could determine a loan’s QM
status. Proponents of these approaches
argued that an underwriting model
would reflect a more holistic
consideration of relevant factors but
remove the risk that creditors misprice
or underprice loans due to competitive
pressures. While many commenters
acknowledged the operational
complexity associated with the Bureau
developing and maintaining an
automated underwriting model, they
argued that this approach would
provide creditors with the certainty of a
loan’s QM status while most accurately
assessing the consumer’s ability to
sustain the mortgage payment.
Commenters also argued that
consumer performance over an
extended period should be considered
sufficient evidence that the creditor
adequately assessed a consumer’s ability
to repay at origination. They
recommended that a loan that is
originated as a non-QM or rebuttable
presumption QM loan should be eligible
to ‘‘season’’ into a QM safe harbor loan
if the consumer makes timely payments
for a pre-determined length of time.
Commenters pointed to the GSE
representation and warranty framework
as precedent for this concept and argued
that a creditor’s legal exposure to the
ATR requirement should also sunset
accordingly. However, several
commenters opposed allowing loans to
season into QMs. They argued that a
period of successful repayment is
insufficient to presume conclusively
that the creditor reasonably determined
ability to repay at origination, that
creditors would engage in gaming to
minimize defaults during the seasoning
period, and that seasoning would
inappropriately prevent consumers from
raising lack of ability to repay as a
defense to foreclosure.
The Bureau is considering adding a
seasoning approach to the ATR/QM
Rule. A seasoning approach would
create an alternative pathway to QM
safe harbor status for certain mortgages
if the consumer has consistently made
timely payments for a specified period
of time. The Bureau in the near future
will issue a separate proposal that
addresses adding such an approach to
the ATR/QM Rule.
3. Other Temporary GSE QM Loan
Issues
As discussed in the ANPR, absent any
changes, the Temporary GSE QM loan
definition will remain in effect until
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January 10, 2021 or the date the GSEs
exit conservatorship, whichever occurs
first. The Bureau sought comment on
whether a short extension would be
necessary to minimize market
disruption and to potentially facilitate
an orderly transition to a new General
QM loan definition. While some
industry and consumer advocates
commented that the Temporary GSE
QM loan definition should be made
permanent, many commenters
supported its expiration following a
short extension to revise the General
QM loan definition. Industry
commenters stated that the length of
time to implement a new General QM
loan definition would largely be
determined by the scale and complexity
of the revisions to the General QM loan
definition. Commenters supporting the
price-based approach indicated that a
relatively short implementation period
likely would be necessary, given the
approach would largely be a
simplification of the existing General
QM construct. Other commenters
suggested linking the date of the
Temporary GSE QM loan definition
expiration to a period following the
publication date of the final General QM
rule, such as one year. As noted above,
the Bureau is issuing a separate NPRM
to address the timing of the expiration
of the Temporary GSE QM Loan
definition.
IV. Legal Authority
The Bureau is proposing to amend
Regulation Z pursuant to its authority
under TILA and the Dodd-Frank Act.
Section 1061 of the Dodd-Frank Act
transferred to the Bureau the ‘‘consumer
financial protection functions’’
previously vested in certain other
Federal agencies, including the Board.
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.’’ 105 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.106
U.S.C. 5581(a)(1)(A).
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).
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106 Dodd-Frank
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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.107 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.’’ 108
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.109
As discussed in the section-by-section
analysis below, the Bureau is proposing
to issue certain provisions of this
proposed rule pursuant to its
rulemaking, adjustment, and exception
authority under TILA section 105(a).
TILA section 129C(b)(2)(A). TILA
section 129C(b)(2)(A)(vi) provides the
Bureau with authority to establish
guidelines or regulations relating to
ratios of total monthly debt to monthly
income or alternative measures of
ability to pay regular expenses after
payment of total monthly debt, taking
into account the income levels of the
borrower and such other factors as the
Bureau may determine relevant and
consistent with the purposes described
in TILA section 129C(b)(3)(B)(i).110 As
discussed in the section-by-section
analysis below, the Bureau is proposing
to issue certain provisions of this
proposed rule pursuant to its authority
under TILA section 129C(b)(2)(A)(vi).
TILA section 129C(b)(3)A), (B)(i).
TILA section 129C(b)(3)(B)(i) authorizes
the Bureau to prescribe regulations that
revise, add to, or subtract from the
criteria that define a QM upon a finding
that such regulations are necessary or
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of TILA
section 129C; or are necessary and
appropriate to effectuate the purposes of
107 15
U.S.C. 1604(a).
U.S.C. 1601(a).
109 15 U.S.C. 1639b(a)(2).
110 15 U.S.C. 1639c(b)(2)(A).
108 15
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TILA sections 129B and 129C, to
prevent circumvention or evasion
thereof, or to facilitate compliance with
such sections.111 In addition, TILA
section 129C(b)(3)(A) directs the Bureau
to prescribe regulations to carry out the
purposes of section 129C.112 As
discussed in the section-by-section
analysis below, the Bureau is proposing
to issue certain provisions of this
proposed rule pursuant to its authority
under TILA section 129C(b)(3)(B)(i).
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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.113 TILA and title X of the DoddFrank Act are Federal consumer
financial laws. Accordingly, the Bureau
is proposing to exercise its authority
under Dodd-Frank Act section 1022(b)
to prescribe rules that carry out the
purposes and objectives of TILA and
title X and prevent evasion of those
laws.
V. Why the Bureau Is Issuing This
Proposal
The Bureau is issuing this proposal to
amend the General QM loan definition
because it is concerned that retaining
the existing General QM loan definition
with the 43 percent DTI limit after the
Temporary GSE QM loan definition
expires would significantly reduce the
size of QM and could significantly
reduce access to responsible, affordable
credit. The Bureau is proposing a pricebased General QM loan definition to
replace the DTI-based approach because
it preliminarily concludes that a loan’s
price, as measured by comparing a
loan’s APR to APOR for a comparable
transaction, is a strong indicator of a
consumer’s ability to repay and is a
more holistic and flexible measure of a
consumer’s ability to repay than DTI
alone.
Under the proposal, a loan would
meet the General QM loan definition in
§ 1026.43(e)(2) only if the APR exceeds
APOR for a comparable transaction by
less than two percentage points as of the
date the interest rate is set. The proposal
would provide higher thresholds for
loans with smaller loan amounts and for
subordinate-lien transactions. The
proposal would retain the existing
product-feature and underwriting
requirements and limits on points and
111 15
U.S.C. 1639c(b)(3)(B)(i).
U.S.C. 1639c(b)(3)(A).
113 12 U.S.C. 5512(b)(1).
112 15
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fees. Although the proposal would
remove the 43 percent DTI limit from
the General QM loan definition, the
proposal would require that the creditor
consider and verify the consumer’s
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 proposal would remove
appendix Q. To prevent uncertainty that
may result from appendix Q’s removal,
the proposal would clarify the
requirements to consider and verify a
consumer’s income, assets, debt
obligations, alimony, and child support.
The proposal would preserve the
current threshold separating safe harbor
from rebuttable presumption QMs,
under which a loan is a safe harbor QM
if its APR exceeds APOR for a
comparable transaction by less than 1.5
percentage points as of the date the
interest rate is set (or by less than 3.5
percentage points for subordinate-lien
transactions).
The Bureau is proposing a price-based
approach to replace the specific DTI
limit because it is concerned that
imposing a DTI limit as a condition for
QM status under the General QM loan
definition may be overly burdensome
and complex in practice and may
unduly restrict access to credit because
it provides an incomplete picture of the
consumer’s financial capacity. In
particular, the Bureau is concerned that
conditioning QM status on a specific
DTI limit may impair access to credit for
some consumers for whom it might be
appropriate to presume ability to repay
for their loans at consummation. For the
reasons set forth below, the Bureau
preliminarily concludes that a pricebased General QM loan definition is
appropriate because a loan’s price, as
measured by comparing a loan’s APR to
APOR for a comparable transaction, is a
strong indicator of a consumer’s ability
to repay and is a more holistic and
flexible measure of a consumer’s ability
to repay than DTI alone.
A. Overview of the General QM Loan
Definition DTI Limit
As discussed above, TILA section
129C(b)(2) defines QM by limiting
certain loan terms and features. The
statute generally prohibits a QM from
permitting an increase of the principal
balance on the loan (negative
amortization), interest-only payments,
most balloon payments, a term greater
than 30 years, and points and fees that
exceed a specified threshold. In
addition, the statute incorporates
limited underwriting criteria that
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overlap with some elements of the
general ATR standard, including
prohibiting ‘‘no-doc’’ loans where the
creditor does not verify income or
assets. TILA does not require DTI ratios
to be included in the definition of a QM.
Rather, the statute authorizes, but does
not require, the Bureau to establish
additional criteria relating to monthly
DTI ratios, or alternative measures of
ability to pay regular expenses after
payment of total monthly debt, taking
into account the income levels of the
consumer and other factors the Bureau
determines relevant and consistent with
the purposes described in TILA section
129C(b)(3)(B)(i).
The Board’s 2011 ATR/QM Proposal.
In the 2011 ATR/QM Proposal, the
Board proposed two alternative
approaches to the General QM loan
definition to implement the statutory
QM requirements.114 The proposed
alternatives differed in the extent to
which, in addition to the statutory QM
requirements, they included factors
from the ATR standard, including
consideration of the consumer’s
monthly DTI ratio.
Alternative 1 under the Board’s
proposal would have included only the
statutory QM requirements and would
not have incorporated the consumer’s
DTI ratio, residual income, or other
factors from the general ATR
standard.115 Among the reasons the
Board cited in support of proposed
Alternative 1 was a concern that DTI
ratios (and residual income) are not
objective and would not provide
certainty that a loan is in fact a QM.116
The Board also cited data showing that
a consumer’s DTI ratio generally does
not have a significant predictive power
of loan performance, once the effects of
credit history, loan type, and loan-tovalue (LTV) ratio are considered.117 The
Board was also concerned that the
benefit of including DTI ratio (or
residual income) requirements in the
definition of QM may not outweigh the
risk of reduced credit availability for
certain consumers who may not meet
widely accepted DTI ratio standards but
may have other compensating factors,
such as sufficient residual income or
other resources, to be able to reasonably
afford the mortgage.118 Proposed
Alternative 1 would have provided
creditors with a safe harbor to establish
compliance with the ATR requirements.
Proposed Alternative 2 would have
included the statutory QM requirements
114 76
FR 27390, 27453 (May 11, 2011).
at 27453.
116 Id. at 27454.
117 Id.
118 Id.
115 Id.
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and additional factors from the general
ATR standard, including a requirement
to consider and verify the consumer’s
DTI ratio or residual income.119 The
Board expressed concern that, absent a
DTI ratio or residual income
requirement, a creditor could originate a
QM without considering the effect of the
new loan payment on the consumer’s
overall financial picture.120 The Board
did not propose a specific limit for the
DTI ratio in the QM definition as part
of Alternative 2.121 The Board cited
several reasons for not proposing a
specific DTI limit. First, the Board was
concerned that setting a specific DTI
ratio threshold could limit credit
availability without providing adequate
off-setting benefits.122 Second, outreach
conducted by the Board revealed a range
of underwriting guidelines for DTI ratios
based on product type, whether
creditors used manual or automated
underwriting, and special
considerations for high- and low-income
consumers.123 The Board was concerned
that setting a specific limit would
require addressing the operational
issues related to the calculation of the
DTI ratio, including defining debt and
income.124 The Board was also
concerned that a specific limit would
require tolerance provisions to account
for mistakes made in calculating the DTI
ratio.125 At the same time, the Board
recognized that creditors and consumers
may benefit from a higher degree of
certainty surrounding the QM
definition.126 Therefore, the Board
solicited comment on whether and how
it should prescribe a specific limit for
the DTI ratio or residual income for the
QM definition.127 The Board’s
Alternative 2 would have provided a
rebuttable presumption of compliance
with the ATR requirements.
The Bureau’s January 2013 Final
Rule. The Bureau’s January 2013 Final
Rule included the statutory QM factors
and additional factors from the general
ATR standard in the General QM loan
definition in § 1026.43(e)(2). However,
instead of incorporating the approach to
DTI from the ATR standard, which
requires a creditor to consider the
consumer’s DTI ratio or residual
income, the Bureau prescribed for the
General QM loan definition a specific
DTI limit of 43 percent in
119 Id.
120 Id.
at 27455.
121 Id. at 27460.
122 Id.
123 Id. at 27461.
124 Id.
125 Id.
126 Id.
127 Id.
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§ 1026.43(e)(2)(vi). In adopting this
approach, the Bureau explained that it
believed the QM criteria should include
a standard for evaluating the consumer’s
ability to repay, in addition to the
product feature restrictions and other
requirements that are specified in
TILA.128 The Bureau stated that the
TILA ATR/QM provisions are
fundamentally about assuring that the
mortgage loan that consumers receive is
affordable, and that the protection from
liability afforded to QMs would not be
reasonable if the creditor made the loan
without considering and verifying
certain core aspects of the consumer’s
financial picture.129
With respect to DTI, the Bureau noted
that DTI ratios are widely used for
evaluating a consumer’s ability to repay
over time because, as the available data
showed, DTI ratio correlates with loan
performance as measured by
delinquency rate.130 The January 2013
Final Rule noted that, at a basic level,
the lower the DTI ratio, the greater the
consumer’s ability to pay back a
mortgage loan.131 The Bureau believed
this relationship between the DTI ratio
and the consumer’s ability to repay
applied both under conditions as they
exist at consummation, as well as under
future changed circumstances, such as
increases in payments for adjustablerate mortgages (ARMs), future
reductions in income, and
unanticipated expenses and new
debts.132 The Bureau’s findings
regarding DTI ratios relied primarily on
analysis of the FHFA’s Historical Loan
Performance (HLP) dataset, data
provided by FHA, and data provided by
commenters.133 The Bureau believed
these data indicated that DTI ratios
correlate with loan performance, as
measured by delinquency rate (where
delinquency is defined as being over 60
days late), in any credit cycle.134 Within
a typical range of DTI ratios creditors
use in underwriting (e.g., under 32
percent DTI to 46 percent DTI), the
Bureau noted that generally, there is a
gradual increase in delinquency with
higher DTI ratio.135 The Bureau also
noted that DTI ratios are widely used as
an important part of the underwriting
FR 6408, 6516 (Jan. 30, 2013).
at 6516.
130 Id. at 6526–27.
131 Id. at 6526.
132 Id. at 6526–27.
133 Id. at 6527.
134 Id.
135 Id. (citing 77 FR 33120, 33122–23 (June 5,
2012) (Table 2: Ever 60+ Delinquency Rates,
summarizing the HLP dataset by volume of loans
and percentage that were ever 60 days or more
delinquent, tabulated by the total DTI on the loans
and year of origination)).
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129 Id.
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41727
processes for both governmental
programs and private lenders.136
To provide certainty for creditors
regarding the loan’s QM status, the
January 2013 Final Rule contained a
specific DTI limit of 43 percent as part
of the General QM loan definition. The
Bureau stated that a specific DTI limit
also provides certainty to assignees and
investors in the secondary market,
which the Bureau believed would help
reduce concerns regarding legal risk and
promote credit availability.137 The
Bureau noted that numerous
commenters had highlighted the value
of providing objective requirements
determined based on information
contained in loan files.138 To that end,
the Bureau provided definitions of debt
and income for purposes of the General
QM loan definition in appendix Q, to
address concerns that creditors may not
have adequate certainty about whether a
particular loan satisfies the
requirements of the General QM loan
definition.139
The Bureau selected 43 percent as the
DTI limit for the General QM loan
definition because, based on analysis of
data available at the time and
comments, the Bureau believed that the
43 percent limit would advance TILA’s
goals of creditors not extending credit
that consumers cannot repay while still
preserving consumers’ access to
credit.140 The Bureau acknowledged
that there is no specific threshold that
separates affordable from unaffordable
mortgages; rather, there is a gradual
increase in delinquency rates as DTI
ratios increase.141 Additionally, the
Bureau noted that a 43 percent DTI ratio
was within the range used by many
creditors, generally comported with
industry standards and practices for
prudent underwriting, and was the
threshold used by FHA as its general
boundary at the time the Bureau issued
the January 2013 Final Rule.142 The
Bureau noted concerns about setting a
higher DTI limit, including concerns
that it could allow QM status for
mortgages for which there is not a sound
reason to presume that the creditor had
a reasonable belief in the consumer’s
ability to repay.143 The Bureau was
especially concerned about this in the
context of QMs that receive a safe
harbor from the ATR requirements.144
136 Id.
137 Id.
138 Id.
139 Id.
140 Id.
141 Id.
142 Id.
143 Id.
at 6528.
144 Id.
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The Bureau was also concerned that a
higher DTI limit would result in a QM
boundary that substantially covered the
entire mortgage market. If that were the
case, creditors might be unwilling to
make non-QM loans, and the Bureau
was concerned that the QM rule would
define the limit of credit availability.145
The Bureau also suggested that a higher
DTI limit might require a corresponding
weakening of the strength of the
presumption of compliance, which the
Bureau believed would largely defeat
the point of adopting a higher DTI
limit.146
Despite the Bureau’s inclusion of a
specific DTI limit in the General QM
loan definition, the Bureau also
acknowledged concerns about the
requirement. The Bureau acknowledged
that the Board, in issuing the 2011 ATR/
QM Proposal, found that DTI ratios may
not have significant predictive power,
once the effects of credit history, loan
type, and LTV ratio are considered.147
Similarly, the Bureau noted that some
commenters responding to the 2011
ATR/QM Proposal suggested that the
Bureau should include compensating
factors in addition to a specific DTI ratio
threshold due to concerns about
restricting access to credit.148 The
Bureau acknowledged that a standard
that takes into account multiple factors
may produce more accurate ability-torepay determinations, at least in specific
cases, but was concerned that
incorporating a multi-factor test or
compensating factors into the QM
definition would undermine the
certainty for creditors and the secondary
market of whether loans were eligible
for QM status.149 The Bureau also
acknowledged arguments that residual
income—generally defined as the
monthly income that remains after a
consumer pays all personal debts and
obligations, including the prospective
mortgage—may be a better measure of
repayment ability.150 However, the
Bureau noted that it lacked sufficient
data to mandate a bright-line rule based
on residual income.151 The Bureau
anticipated further study of the issue as
part of the five-year assessment of the
rule.152
The Bureau acknowledged in the
January 2013 Final Rule that the 43
percent DTI limit in the General QM
loan definition could restrict access to
145 Id.
146 Id.
147 Id.
at 6527.
148 Id.
149 Id.
150 Id.
at 6528.
credit given market conditions at the
time the rule was issued. Among other
things, the Bureau expressed concern
that, as the mortgage market recovered
from the financial crisis, there would be
a limited non-QM market, which, in
conjunction with the 43 percent DTI
limit, could impair access to credit for
consumers with DTI ratios over 43
percent.153 To preserve access to credit
for such consumers while the market
recovered, the Bureau adopted the
Temporary GSE QM loan definition,
which did not include a specific DTI
limit. As discussed below, the
Temporary GSE QM loan definition
continues to play a significant role in
ensuring access to credit for consumers.
B. Considerations Related to the General
QM Loan Definition DTI Limit
The Bureau’s own experience and the
feedback it has received from
stakeholders since issuing the January
2013 Final Rule suggest that imposing a
DTI limit as a condition for QM status
under the General QM loan definition
may be overly burdensome and complex
in practice and may unduly restrict
access to credit because it provides an
incomplete picture of the consumer’s
financial capacity. While the Bureau
acknowledges that DTI ratios generally
correlate with loan performance, as the
Bureau found in the January 2013 Final
Rule and as shown in recent Bureau
analysis described below, the Bureau
also notes that a consumer’s DTI ratio is
only one way to measure financial
capacity and is not a holistic measure of
the consumer’s ability to repay.
In particular, the Bureau is concerned
that imposing a DTI limit as a condition
for QM status under the General QM
loan definition may deny QM status for
loans to some consumers for whom it
might be appropriate to presume ability
to repay at consummation, and that
denying QM status to such loans risks
denying consumers access to
responsible, affordable credit.
Numerous stakeholders, including
commenters responding to the ANPR,
have argued that the current approach to
DTI ratios as part of the General QM
loan definition is not appropriate
because it creates problems for some
consumers’ ability to access credit when
their DTI ratio is above a bright-line
threshold. These access to credit
concerns are especially acute for lowerincome and minority consumers.
The Bureau acknowledges that the
current approach to DTI ratios under the
General QM loan definition may also
stifle innovation in underwriting
because it focuses on a single metric,
151 Id.
152 Id.
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with strict verification rules. The
current approach to DTI ratios under the
General QM loan definition may
constrain new approaches to assessing
repayment ability, including the use of
technology as part of the underwriting
process. Such innovations include
certain new uses of cash flow data and
analytics to underwrite mortgage
applicants. This emerging technology
has the potential to accurately assess
consumers’ ability to repay using, for
example, bank account data that can
identify the source and frequency of
recurring deposits and payments and
identify remaining disposable income.
Identifying the remaining disposable
income could be a method of assessing
the consumer’s residual income and
could potentially satisfy a requirement
to consider either DTI or residual
income, absent a specific DTI limit. This
innovation could potentially expand
access to responsible, affordable
mortgage credit, particularly for
applicants with non-traditional income
and limited credit history. The potential
negative effect of the rule on innovation
in underwriting may be heightened
while the market is largely concentrated
in the QM lending space and may limit
access to credit for some consumers
with DTI ratios above 43 percent.
The Bureau’s 2019 ATR/QM
Assessment Report highlights the
tradeoffs of conditioning the General
QM loan definition on a DTI limit. The
Assessment Report included specific
findings about the General QM loan
definition’s DTI limit, including certain
findings related to DTI ratios as
probative of a consumer’s ability to
repay. The Assessment Report found
that loans with higher DTI ratios have
been associated with higher levels of
‘‘early delinquency’’ (i.e., delinquency
within two years of origination), which,
as explained below, may serve as a
proxy for measuring whether a
consumer had a reasonable ability to
repay at the time the loan was
consummated.154 For example, the
Assessment Report notes that for all
periods and samples studied, a positive
relationship between DTI ratios and
early delinquency is present and
economically meaningful.155 The
Assessment Report states that higher
DTI ratios independently increase
expected early delinquency, regardless
of other underwriting criteria.156
At the same time, findings from the
Assessment Report indicate that the
specific 43 percent DTI limit in the
154 See Assessment Report, supra note 58, at 83–
84, 100–05.
155 Assessment Report at 104–05.
156 Id. at 105.
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current rule has restricted access to
credit, particularly in the absence of a
robust non-QM market. The report
found that, for high-DTI consumers—
i.e., consumers with DTI ratios above 43
percent—who qualify for loans eligible
for purchase or guarantee by the GSEs,
the Rule has not decreased access to
credit.157 However, the Assessment
Report attributes the fact that the 43
percent DTI limit has not reduced
access to credit for such consumers to
the existence of the Temporary GSE QM
loan definition. The findings in the
Assessment Report indicate that there
would be some reduction in access to
credit for high-DTI consumers when the
Temporary GSE QM loan definition
expires, absent changes to the General
QM loan definition. For example, based
on application-level data obtained from
nine large lenders, the Assessment
Report found that the January 2013
Final Rule eliminated between 63 and
70 percent of non-GSE eligible, high-DTI
home purchase loans.158 The Bureau is
concerned about a similar effect for
loans with DTI ratios above 43 percent
when the Temporary GSE QM loan
definition expires. The Bureau
acknowledges that the Assessment
Report’s finding, without other
information, does not prove or disprove
the effectiveness of the DTI limit in
achieving the purposes of the January
2013 Final Rule in ensuring consumers’
ability to repay the loan. If the denied
applicants in fact lacked the ability to
repay, then the reduction in approval
rates is an appropriate consequence of
the Rule. However, if the denied
applicants did have the ability to repay,
then these data suggest an unintended
consequence of the Rule. This
possibility is supported by the fact that
other findings in the Assessment Report
suggest that applicants for high-DTI
ratio, non-GSE eligible loans are being
denied, even though other
compensating factors indicate that some
of them may have the ability to repay
their loans.159
The current state of the non-QM
market heightens the access to credit
concerns related to the specific 43
percent DTI limit, particularly if such
conditions persist after the expiration of
the Temporary GSE QM loan definition.
The Bureau stated in the January 2013
157 See,
e.g., id. at 10, 194–96.
e.g., id. at 10–11, 117, 131–47.
159 See, e.g., Assessment Report supra note 58, at
150, 153, Table 20. Table 20 illustrates how the
pool of denied non-GSE eligible high-DTI
applicants has changed between 2013 and 2014.
After the introduction of the Rule, the pool of
denied applicants contains more consumers with
higher incomes, higher FICO scores, and higher
down payments.
158 See,
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Final Rule that it believed mortgages
that could be responsibly originated
with DTI ratios that exceed 43 percent,
which historically includes over 20
percent of mortgages, would be made
under the general ATR standard.160
However, the Assessment Report found
that a robust market for non-QM loans
above the 43 percent DTI limit has not
materialized as the Bureau had
predicted. Therefore, there is limited
capacity in the non-QM market to
provide access to credit after the
expiration of the Temporary GSE QM
loan definition.161 As described above,
the non-QM market has been further
reduced by the recent economic
disruptions associated with the COVID–
19 pandemic, with most mortgage credit
now available in the QM lending space.
The Bureau acknowledges that the slow
development of the non-QM market,
and the recent economic disruptions
associated with the COVID–19
pandemic that may significantly hinder
its development in the near term, may
further reduce access to credit outside
the QM space.
The Bureau also has particular
concerns about the effects of the
appendix Q definitions of debt and
income on access to credit. The Bureau
intended for appendix Q to provide
creditors with certainty about the DTI
ratio calculation to foster compliance
with the General QM loan definition.
However, based on extensive
stakeholder feedback and its own
experience, the Bureau recognizes that
appendix Q’s definitions of debt and
income are rigid and difficult to apply
and do not provide the level of
compliance certainty that the Bureau
anticipated. Stakeholders have reported
that these concerns are particularly
acute for transactions involving selfemployed consumers, consumers with
part-time employment, and consumers
with irregular or unusual income
streams. The standards in appendix Q
could negatively impact access to credit
for these consumers, particularly after
expiration of the Temporary GSE QM
loan definition. The Assessment Report
also noted concerns with the perceived
lack of clarity in appendix Q and found
that such concerns ‘‘may have
contributed to investors’—and at least
derivatively, creditors’—preference’’ for
Temporary GSE QM loans.162 Appendix
Q, unlike other standards for calculating
and verifying debt and income, has not
been revised since 2013.163 The current
definitions of debt and income in
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Report, supra note 58, at 198.
162 Id. at 193.
163 Id. at 193–94.
appendix Q have proven to be complex
in practice, and, as discussed below, the
Bureau has concerns about other
potential approaches to defining debt
and income in connection with
conditioning QM status on a specific
DTI limit.
At the time of the January 2013 Final
Rule, the Bureau sought to provide a
period for economic, market, and
regulatory conditions to stabilize and for
a reasonable transition period to the
General QM loan definition and nonQM loans above a 43 percent DTI ratio.
However, contrary to the Bureau’s
expectations, lending largely has
remained in the Temporary GSE QM
loan space, and a robust and sizable
market to support non-QM lending has
not yet emerged.164 As noted above, the
Bureau acknowledges that the recent
economic disruptions associated with
the COVID–19 pandemic may further
hinder development of the non-QM
market, at least in the near term. The
Bureau expects that a significant
number of Temporary GSE QM loans
would not qualify as General QM loans
under the current rule after the
Temporary GSE QM loan definition
expires, either because they have DTI
ratios above 43 percent or because their
method of documenting and verifying
income or debt is incompatible with
appendix Q. Although alternative loan
options would still be available to many
consumers after expiration of the
Temporary GSE QM loan definition, the
Bureau anticipates that, with respect to
loans that are currently Temporary GSE
QM loans and would not otherwise
qualify as General QM loans under the
current definition, some would cost
materially more for consumers and
some would not be made at all.
Specifically, the Bureau’s Dodd-Frank
Act 1022(b) Analysis, below, estimates
that, as a result of the General QM loan
definition’s 43 percent DTI limit,
approximately 957,000 loans—16
percent of all closed-end first-lien
residential mortgage originations in
2018—would be affected by the
expiration of the Temporary GSE QM
loan definition.165 An additional,
smaller number of loans that currently
qualify as Temporary GSE QM loans
may not fall within the General QM loan
definition after expiration of the
Temporary GSE QM loan definition
because the method used for verifying
income or debt would not comply with
160 78
164 Id.
161 Assessment
165 Dodd-Frank
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at 198.
Act section 1022(b) (analysis cites
the Bureau’s prior estimate of affected loans in the
ANPR); see 84 FR 37155, 37159 (July 31, 2019).
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appendix Q.166 The Temporary GSE QM
loan definition is currently set to expire
upon the earlier of January 10, 2021 or
when GSE conservatorship ends, and
the Bureau believes that many loans
currently originated under the
Temporary GSE QM loan definition may
cost materially more or may not be
made at all, absent changes to the
General QM loan definition. After the
Temporary GSE QM loan definition
expires, the Bureau expects that many
consumers with DTI ratios above 43
percent who would have received a
Temporary GSE QM loan would instead
obtain FHA-insured loans since FHA
currently insures loans with DTI ratios
up to 57 percent.167 The number of
loans that move to FHA would depend
on FHA’s willingness and ability to
insure such loans, whether FHA
continues to treat all loans that it
insures as QMs under its own QM rule,
and how many loans that would have
been originated as Temporary GSE QM
loans with DTI ratios above 43 percent
exceed FHA’s loan-amount limit.168 For
example, the Bureau estimates that, in
2018, 11 percent of Temporary GSE QM
loans with DTI ratios above 43 percent
exceeded FHA’s loan-amount limit.169
Thus, the Bureau considers that at most
89 percent of loans that would have
been Temporary GSE QM loans with
DTI ratios above 43 percent could move
to FHA.170 The Bureau expects that
loans that are originated as FHA loans
instead of under the Temporary GSE
QM loan definition generally would cost
materially more for many consumers.171
The Bureau expects that some
166 Id.
at 37159 n.58.
fiscal year 2019, approximately 57 percent
of FHA-insured purchase mortgages had a DTI ratio
above 43 percent. U.S. Dep’t of Hous. & Urban Dev.,
Annual Report to Congress Regarding the Financial
Status of the FHA Mutual Mortgage Insurance
Fund, Fiscal Year 2019, at 33 using data from App.
B Tabl. B9 (Nov. 14, 2018), https://www.hud.gov/
sites/dfiles/Housing/documents/
2019FHAAnnualReportMMIFund.pdf.
168 84 FR 37155, 37159 (July 31, 2019).
169 Id. In 2018, FHA’s county-level maximum
loan limits ranged from $294,515 to $679,650 in the
continental United States. See U.S. Dep’t of Hous.
& Urban Dev., FHA Mortgage Limits, https://
entp.hud.gov/idapp/html/hicostlook.cfm (last
visited June 21, 2020).
170 84 FR 37155, 37159 (July 31, 2019).
171 Interest rates and insurance premiums on FHA
loans generally feature less risk-based pricing than
conventional loans, charging more similar rates and
premiums to all consumers. As a result, they are
likely to cost more than conventional loans for
consumers with stronger credit scores and larger
down payments. Consistent with this pricing
differential, consumers with higher credit scores
and larger down payments chose FHA loans
relatively rarely in 2018 HMDA data on mortgage
originations. See Bureau of Consumer Fin. Prot.,
Introducing New and Revised Data Points in
HMDA, August 2019, https://
files.consumerfinance.gov/f/documents/cfpb_newrevised-data-points-in-hmda_report.pdf.
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consumers offered FHA loans may
choose not to take out a mortgage
because of these higher costs.
It is also possible that some
consumers with DTI ratios above 43
percent would be able to obtain loans in
the private market.172 The ANPR noted
that the number of loans absorbed by
the private market would likely depend,
in part, on whether actors in the private
market are willing to assume the legal
or credit risk associated with funding—
as non-QM loans or small-creditor
portfolio QM loans—loans that would
have been Temporary GSE QM loans
(with DTI ratios above 43 percent) 173
and, if so, whether actors in the private
market would offer more competitive
pricing or terms.174 For example, the
Bureau estimates that 55 percent of
loans that would have been Temporary
GSE QM loans (with DTI ratios above 43
percent) in 2018 had credit scores at or
above 680 and LTV ratios at or below 80
percent—credit characteristics
traditionally considered attractive to
actors in the private market.175 The
ANPR also noted that there are certain
built-in costs to FHA loans—namely,
mortgage insurance premiums—which
could be a basis for competition, and
that depository institutions in recent
years have shied away from originating
and servicing FHA loans due to the
obligations and risks associated with
such loans.176 At the same time, the
Assessment Report found there has been
limited momentum toward a greater role
for private market non-QM loans. It is
uncertain how great this role will be in
the future,177 particularly in the short
term due to the economic effects of the
COVID–19 pandemic. Finally, the ANPR
noted that some consumers with DTI
ratios above 43 percent who would have
sought Temporary GSE QM loans may
adapt to changing options and make
different choices, such as adjusting their
borrowing to result in a lower DTI
ratio.178 However, some consumers who
would have sought Temporary GSE QM
loans (with DTI ratios above 43 percent)
may not obtain loans at all.179 For
example, based on application-level
data obtained from nine large lenders,
FR 37155, 37159 (July 31, 2019).
12 CFR 1026.43(e)(5) (extending QM
status to certain portfolio loans originated by
certain small creditors). In addition, section 101 of
the Economic Growth, Regulatory Relief, and
Consumer Protection Act, Public Law 115–174, 132
Stat. 1296 (2018), amended TILA to add a safe
harbor for small creditor portfolio loans. See 15
U.S.C. 1639c(b)(2)(F).
174 84 FR 37155, 37159 (July 31, 2019).
175 Id.
176 Id.
177 Id.
178 Id.
179 Id.
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173 See
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the Assessment Report found that the
January 2013 Final Rule eliminated
between 63 and 70 percent of non-GSE
eligible, high-DTI home purchase
loans.180
In the separate Extension Proposal,
the Bureau is proposing to replace the
January 10, 2021 sunset date with a
provision that would amend the
Temporary GSE QM loan definition so
that it would expire upon the earlier of
the effective date of final amendments
to the General QM loan definition, or
when GSE conservatorship ends.181 The
Bureau is issuing that separate proposal
to ensure that responsible, affordable
credit remains available to consumers
who may be affected if the Temporary
GSE QM loan definition expires before
amendments to the General QM loan
definition take effect.
C. Why the Bureau Is Proposing a PriceBased QM Definition To Replace the
General QM Loan Definition DTI Limit
Given the significant issues associated
with the 43 percent DTI limit, the
Bureau is proposing to remove that
requirement from the General QM loan
definition in § 1026.43(e)(2)(vi) and
replace it with a requirement based on
the price of the loan. Specifically, in
addition to the statutory product
features and underwriting restrictions
that apply under the current rule, a loan
would meet the General QM loan
definition only if the APR exceeds
APOR for a comparable transaction by
less than two percentage points as of the
date the interest rate is set. The proposal
would provide higher thresholds for
loans with smaller loan amounts and for
subordinate-lien transactions. Although
the proposal would remove the 43
percent DTI limit from the General QM
loan definition, it would require that the
creditor: (1) Consider the consumer’s
income or assets, debt obligations,
alimony, and child support, and
monthly DTI ratio or residual income,
and (2) 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
proposal would remove appendix Q but
would clarify the requirements to
consider and verify a consumer’s
180 See Assessment Report supra note 58, at 10–
11, 117, 131–47.
181 As the Bureau notes in the separate Extension
Proposal, the Bureau does not intend for the
effective date of final amendments to the General
QM loan definition to be prior to April 1, 2021.
Thus, the Bureau does not intend for the Temporary
GSE QM loan definition to expire prior to April 1,
2021.
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income, assets, debt obligations,
alimony, and child support, to help
prevent compliance uncertainty that
could otherwise result from the removal
of appendix Q. Consistent with the
current rule, the proposal would
preserve the current threshold
separating safe harbor from rebuttable
presumption QMs, under which a loan
is a safe harbor QM if its APR exceeds
APOR for a comparable transaction by
less than 1.5 percentage points as of the
date the interest rate is set.182
The Bureau acknowledges there is
significant debate over whether loan
pricing, a consumer’s DTI ratio, or
another direct or indirect measure of a
consumer’s personal finances is a better
predictor of loan performance,
particularly when analyzed across
various points in the economic cycle.183
Some commenters responding to the
ANPR advocated for retaining a DTI
requirement as part of the General QM
loan definition, arguing that it is a
strong indicator of a consumer’s ability
to repay. Other commenters suggested a
range of options to replace the current
DTI requirement in the General QM loan
definition, including by prescribing a
residual income test; allowing
compensating factors (such as LTV
ratios and credit scores) in conjunction
with a DTI ratio; and defining QM by
reference to widely used underwriting
standards. In seeking comments on this
proposal, the Bureau is not determining
whether DTI ratios, a loan’s price, or
some other measure is the best predictor
of loan performance. As discussed
below, analysis provided by
stakeholders and the Bureau’s own
analysis show that pricing is strongly
182 The current rule provides a higher safe harbor
threshold of 3.5 percentage points over APOR for
small creditor portfolio QMs and balloon-payment
QMs made by certain small creditors pursuant to
§ 1026.43(e)(5), (e)(6) and (f). See § 1026.43(b)(4).
This proposal would not alter those thresholds.
183 See, e.g., Norbert Michel, The Best Housing
Finance Reform Options for the Trump
Administration, Forbes (July 15, 2019), https://
www.forbes.com/sites/norbertmichel/2019/07/15/
the-best-housing-finance-reform-options-for-thetrump-administration/#4f5640de7d3f; Eric Kaplan
et al., Milken Institute, A Blueprint for
Administrative Reform of the Housing Finance
System, at 17 (Jan. 2019), https://
assets1b.milkeninstitute.org/assets/Publication/
Viewpoint/PDF/Blueprint-Admin-Reform-HFSystem-1.7.2019-v2.pdf (suggesting that the Bureau
both (1) expand the 43 percent DTI limit to 45
percent to move market share of higher-DTI loans
from the GSEs and FHA to the non-agency market,
and (2) establish a residual income test to protect
against the risk of higher DTI loans); Morris Davis
et al., A Quarter Century of Mortgage Risk (FHFA,
Working Paper 19–02, 2019), https://www.fhfa.gov/
PolicyProgramsResearch/Research/Pages/
wp1902.aspx (examining various loan
characteristics and a summary measure of risk—the
stressed default rate—for predictiveness of loan
performance).
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correlated with loan performance, based
on early delinquency rates, across a
variety of loans and economic
conditions. However, the Bureau
acknowledges that DTI is also predictive
of loan performance and that other
direct and indirect measures of
consumer finances may also be
predictive of loan performance. The
Bureau does not make a finding here on
whether or to what extent one measure
clearly outperforms others in predicting
loan performance. Rather, the Bureau
has weighed several policy
considerations in selecting an approach
for the proposal based on the purposes
of the ATR/QM provisions of TILA.
In particular, the Bureau has balanced
considerations related to ensuring
consumers’ ability to repay and
maintaining access to credit in deciding
to seek comment on replacing the
current 43 percent DTI limit with a
price-based approach. The Bureau
continues to view the statute as
fundamentally about assuring that
consumers receive mortgage credit that
they are able to repay. However, the
Bureau is also concerned about
maintaining access to responsible,
affordable mortgage credit. The Bureau
is concerned that the current General
QM loan definition, with a 43 percent
DTI limit, would result in a significant
reduction in the scope of QM and could
reduce access to responsible, affordable
mortgage credit after the Temporary
GSE QM loan definition expires. The
lack of a robust non-QM market
enhances those concerns. Although the
Bureau noted in the January 2013 Final
Rule that it expected access to credit
outside of the QM lending space to
develop over time, the Assessment
Report found that a robust and sizable
market to support non-QM lending has
not emerged since the Rule took
effect.184 The Bureau also acknowledges
that the non-QM market has been
further reduced by the recent economic
disruptions associated with the COVID–
19 pandemic, with most mortgage credit
now available in the QM lending space.
Although it remains possible that, over
time, a substantial market for non-QM
loans will emerge, that market has
developed slowly, and the recent
economic disruptions associated with
the COVID–19 pandemic may
significantly hinder its development, at
least in the near term.
With respect to ability to repay, the
Bureau has focused on analysis of early
delinquency rates to evaluate whether a
loan’s price, as measured by the spread
of APR over APOR (herein referred to as
the loan’s rate spread), may be an
PO 00000
appropriate measure of whether a loan
should be presumed to comply with the
ATR provisions. 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
reasonably within consumers’ ability to
repay.185 As such, consistent with the
Bureau’s prior analyses in the
Assessment Report, the Bureau uses
early distress as a proxy for the lack of
the consumer’s ability to repay at
consummation across a wide pool of
loans. Consistent with the Assessment
Report, for the analyses of early
delinquency rates below, the Bureau
measures early distress as whether a
consumer was ever 60 or more days past
due within the first 2 years after
origination (referred to herein as the
early delinquency rate).186 The Bureau’s
analysis focuses on early delinquency
rates to capture consumers’ difficulties
in making payments soon after
consummation of the loan (i.e., within
the first 2 years), even if these
delinquencies do not lead to consumers
potentially losing their homes (i.e., 60 or
more days past due, as opposed to 90 or
more days or in foreclosure), as early
difficulties in making payments
indicates higher likelihood that the
consumer may have lacked ability to
repay at consummation. As in the
Assessment Report, the Bureau assumes
that the average early delinquency rate
across a wide pool of mortgages—
whether safe harbor QM, rebuttable
presumption QM, or non-QM—is
probative of whether such loans are
reasonably within consumers’
repayment ability, and that the
dependence of these early delinquency
rates on the defining characteristics of
such loans is probative of how those
characteristics may influence repayment
ability. The Bureau acknowledges that
alternative measures of delinquency,
including those used in analyses
submitted as comments on the ANPR,
may also be probative of repayment
ability.
The Bureau has reviewed the
available evidence to assess whether
rate spreads can distinguish loans that
are likely to have low early delinquency
rates—and thus may be presumed to
reasonably reflect the consumer’s ability
to repay—from loans that are likely to
have higher rates of delinquency—for
which it would not be appropriate to
presume the consumer’s ability to repay.
The Bureau’s own analysis and recent
185 Id.
184 Assessment
Frm 00017
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at 83.
186 Id.
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analyses published in response to the
Bureau’s ANPR and RFIs provide strong
evidence of increasing early
delinquency rates with higher rate
spreads across a range of datasets, time
periods, loan types, measures of rate
spread, and measures of delinquency.
The Bureau’s delinquency analysis uses
data from the National Mortgage
Database (NMDB),187 including a
matched sample of NMDB and HMDA
loans.188 As described below, analysis
of these datasets shows that early
delinquency rates rise with rate spread.
Table 1 shows early delinquency rates
for 2002–2008 first-lien purchase
originations in the NMDB, with loans
categorized according to their
approximate rate spread. The Bureau
analyzed 2002 through 2008 origination
years because the relatively fixed
private mortgage insurance (PMI)
pricing during these years allows for
reliable approximation of this important
component of rate spreads.189 The
sample is restricted to loans without
product features that would make them
187 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. (The NMDB, jointly
developed by the FHFA and the Bureau, provides
de-identified loan characteristics and performance
information for a five 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.)
188 HMDA was originally enacted by Congress in
1975 and is implemented by Regulation C, 12 CFR
part 1003. See Bureau of Consumer Fin. Prot.,
Mortgage data (HMDA), https://
www.consumerfinance.gov/data-research/hmda/.
HMDA requires many financial institutions to
maintain, report, and publicly disclose loan-level
information about mortgages. These data are housed
here to help show whether lenders are serving the
housing needs of their communities; they give
public officials information that helps them make
decisions and policies; and they shed light on
lending patterns that could be discriminatory. The
public data are modified to protect applicant and
borrower privacy.
189 See Neil Bhutta and Benjamin J. Keys, Eyes
Wide Shut? The Moral Hazard of Mortgage Insurers
during the Housing Boom, NBER Working Paper
No. 24844, https://www.nber.org/papers/
w24844.pdf. APOR is approximated with weekly
Freddie Mac Primary Mortgage Market Survey
(PMMS) data, retrieved from Fed. Reserve Bank of
St. Louis, Fed. Reserve Econ. Data,; https://
fred.stlouisfed.org/, March 4, 2020. Each loan’s APR
is approximated by the sum of the interest rate in
the NMDB data and an assumed PMI payment of
0.32, 0.52, or 0.78 percentage points for loans with
LTVs above 80 but at or below 85, above 85 but at
or below 90, and above 90, respectively. These PMI
are based on standard industry rates during this
time period. The 30-year Fixed Rate PMMS average
is used for fixed-rate loans with terms over 15 years,
and 15-year Fixed Rate PMMS is used for loans
with terms of 15 years or less. The 5/1-year
Adjustable-Rate PMMS average is used (for
available years) for ARMs with a first interest rate
reset occurring 5 or more years after origination,
while the 1-year adjustable-rate PMMS average is
used for all other ARMs.
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non-QM under the current rule. Table 1
shows that early delinquency rates
increase consistently with rate spreads,
from a low of 2 percent among loans
with rate spreads below or near zero, up
to 14 percent for loans with rate spreads
of 2.25 percentage points or more over
APOR.190 The Bureau notes that this
sample includes loans originated during
the peak of the housing boom and
delinquencies that occurred during the
ensuing recession, contributing to the
high overall levels of early delinquency.
TABLE 1—2002–2008 ORIGINATIONS,
EARLY DELINQUENCY RATE BY RATE
SPREAD
Rate spread (interest rate
+ PMI approximation—
PMMS191) in percentage
points
Early
delinquency rate
(percent)
< 0 ..................................
0–0.24 .............................
0.25–0.49 ........................
0.50–0.74 ........................
0.75–0.99 ........................
1.00–1.24 ........................
1.25–1.49 ........................
1.50–1.74 ........................
1.75–1.99 ........................
2.00–2.24 ........................
2.25 and above ...............
2
2
4
5
6
8
10
12
13
14
14
Analysis of additional data, as
reflected in Table 2, also shows early
delinquency rates rising with rate
spread. Table 2 shows early
delinquency statistics for 2018 NMDB
first-lien purchase originations that have
been matched to 2018 HMDA data,
enabling the Bureau to use actual rate
spreads over APOR rather than
approximated rate spreads in its
analysis.192 As with the data reflected in
Table 1, loans with product features that
would make them non-QM under the
current rule are excluded from Table 2.
However, only delinquencies occurring
through December 2019 are observed in
Table 2, meaning most loans are not
observed for a full two years after
origination. This more recent sample
provides insight into early delinquency
rates under post-crisis lending
standards, and for an origination cohort
that had not undergone (as of December
with rate spreads of 2.25 percentage
points or more are grouped in Tables 1 and 5 to
ensure sufficient sample size for reliable analysis of
the 2002–2008 data. This grouping ensures that all
cells shown in Table 5 contain at least 500 loans.
191 Freddie Mac’s PMMS is the source of data
underlying APOR rate for most mortgages. See
supra note 189 for additional details.
192 Where possible, the FHFA provided an
anonymized match of HMDA loan identifiers for
2018 NMDB originations, allowing the Bureau to
analyze more detailed HMDA loan characteristics
(e.g., rate spread over APOR) for approximately half
of 2018 NMDB originations.
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190 Loans
Frm 00018
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Sfmt 4702
2019) a large economic downturn. The
2018 data are divided into wider bins
(as compared to Table 1) to ensure
enough loans per bin. As with Table 1,
Table 2 shows that early delinquency
rates increase consistently with rate
spreads, from a low of 0.2 percent for
loans with rate spreads near APOR or
below APOR, up to 4.2 percent for loans
with rate spreads of 2 percentage points
or more over APOR.193
TABLE 2—2018 ORIGINATIONS, EARLY
DELINQUENCY RATE BY RATE SPREAD
Rate spread over APOR
in percentage points
< 0 ..................................
0–0.49 .............................
0.50–0.99 ........................
1.00–1.49 ........................
1.50–1.99 ........................
2.00 and above ...............
Early
delinquency rate
(as of Dec. 2019)
(percent)
0.2
0.2
0.6
1.7
2.7
4.2
Given the specific DTI limit under the
current rule, the Bureau also analyzed
the relationship between DTI ratios and
early delinquency for the same samples
of loans in Tables 3 and 4. The Bureau’s
analyses show that early delinquency
rates increase consistently with DTI
ratio in both samples. In the 2002–2008
sample, early delinquency rates increase
from a low of 3 percent among loans
with DTI ratios at or below 25 percent,
up to 9 percent for loans with DTI ratios
between 61 and 70 percent.194 In the
2018 sample, early delinquency rates
increase from 0.4 percent among loans
with DTI ratios at or below 25 percent,
up to 0.9 percent among loans with DTI
ratios between 44 and 50.195 The
difference in early delinquency rates
between loans with the highest and
lowest DTI ratios is smaller than the
difference in early delinquency rates
between the highest and lowest rate
spreads during both periods. For these
samples and bins of rate spread and DTI
ratios, this pattern is consistent with a
stronger correlation between rate spread
and early delinquency than between
DTI ratios and early delinquency.
193 Loans with rate spreads of 2 percentage points
or more are grouped in Tables 2 and 6 to ensure
sufficient sample size for reliable analysis of the
2018 data. This grouping ensures that all cells
shown in Table 6 contain at least 500 loans.
194 Fewer than 0.7 percent of loans have reported
DTI ratios over 70 percent in the 2002–2008 data.
These loans are excluded from Tables 3 and 5 due
to reliability concerns and to ensure that all cells
shown in Table 5 contain at least 500 loans.
195 Fewer than 0.5 percent of loans have reported
DTI ratios over 50 percent in the 2018 data. These
loans are excluded from Tables 4 and 6 due to
reliability concerns and to ensure that all cells
shown in Table 6 contain at least 500 loans.
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TABLE 3—2002–2008 ORIGINATIONS,
EARLY DELINQUENCY RATE BY DTI
RATIO (PERCENTAGE)
TABLE 4—2018 ORIGINATIONS, EARLY
DELINQUENCY RATE BY DTI
Early
delinquency rate
DTI
0–20 ................................
21–25 ..............................
26–30 ..............................
31–35 ..............................
36–40 ..............................
41–43 ..............................
44–45 ..............................
46–48 ..............................
49–50 ..............................
51–60 ..............................
61–70 ..............................
3
3
4
5
6
6
7
7
8
8
9
Early
delinquency rate
(as of Dec. 2019)
(percent)
DTI
0–25 ................................
26–35 ..............................
36–43 ..............................
44–48 ..............................
49–50 ..............................
0.4
0.5
0.7
0.9
0.9
To further analyze the strengths of
DTI ratios and pricing in predicting
early delinquency rates, Tables 5 and 6
show the early delinquency rates of
these same samples categorized
according to both their DTI ratios and
their rate spreads. Table 5 shows early
delinquency rates for 2002–2008 firstlien purchase originations in the NMDB,
with loans categorized according to both
their DTI ratio and their approximate
rate spread. For loans within a given
DTI ratio range, those with higher rate
spreads consistently had higher early
delinquency rates. Loans with low rate
spreads had relatively low early
delinquency rates even at high DTI ratio
levels, as seen in the 2 percent early
delinquency rate for loans priced below
APOR but with DTI ratios of 46 to 48
percent, 51 to 60 percent, and 61 to 70
percent. However, the highest early
delinquency rates occurred for loans
with high rate spreads and high DTI
ratios, reaching 26 percent for loans
priced 2 to 2.24 percentage points above
APOR with DTI ratios of 61 to 70
percent. Across DTI bins, loans priced 2
percentage points or more above APOR
had early delinquency much higher
than loans priced below APOR.
TABLE 5—2002–2008 ORIGINATIONS, EARLY DELINQUENCY RATE BY RATE SPREAD AND DTI RATIO
Rate spread (interest rate + PMI
approx.—PMMS) in percentage
points
DTI
0–20
(%)
<0 .....................................................
0–0.24 ..............................................
0.25–0.49 .........................................
0.50–0.74 .........................................
0.75–0.99 .........................................
1.00–1.24 .........................................
1.25–1.49 .........................................
1.50–1.74 .........................................
1.75–1.99 .........................................
2.00–2.24 .........................................
2.25 and above ................................
DTI
21–25
(%)
2
2
3
4
4
6
6
7
7
6
7
Similarly, Table 6 shows average early
delinquency statistics, with loans
categorized according to both DTI and
rate spread, for the sample of 2018
NMDB first-lien purchase originations
that have been matched to 2018 HMDA
data.196 For Table 6, the higher early
DTI
26–30
(%)
1
2
3
4
5
6
7
8
8
10
9
DTI
31–35
(%)
1
2
3
4
5
6
8
9
10
10
10
DTI
36–40
(%)
2
2
3
4
6
7
8
10
12
12
13
DTI
41–43
(%)
2
2
4
5
6
7
10
13
14
15
15
DTI
44–45
(%)
2
3
5
6
7
9
11
13
15
15
16
delinquency rate for loans with higher
rate spreads over APOR matches the
pattern shown in the data from Table 5.
Overall early delinquency rates are
substantially lower, reflecting the
importance of economic conditions in
the likelihood of delinquency for any
DTI
46–48
(%)
2
3
4
6
7
9
12
15
16
17
16
2
3
5
6
7
9
12
14
16
19
18
DTI
49–50
(%)
DTI
51–60
(%)
3
3
5
7
8
10
12
16
16
18
19
DTI
61–70
(%)
2
3
5
7
8
11
14
15
18
20
20
2
3
5
7
10
13
15
20
22
26
25
given consumer. However, the 2018
loans priced 2 percentage points or
more above APOR also had early
delinquency rates much higher than
loans priced below APOR.
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TABLE 6—2018 ORIGINATIONS, EARLY DELINQUENCY RATE BY RATE SPREAD AND DTI RATIO
Rate spread over APOR in percentage points
DTI
0–25
(%)
DTI
26–35
(%)
< 0 ....................................................................................................................................
0–0.49 ..............................................................................................................................
0.50–0.99 .........................................................................................................................
1.00–1.49 .........................................................................................................................
1.50–1.99 .........................................................................................................................
2.00 and above ................................................................................................................
0.1
0.2
0.1
1.0
....................
....................
DTI
36–43
(%)
0.1
0.1
0.4
1.4
3.2
4.4
DTI
44–50
(%)
0.2
0.3
0.8
1.5
2.5
3.9
0.3
0.3
0.8
2.3
2.3
4.2
The Bureau notes that the high
relative risk of early delinquency for
higher-priced loans holds across
samples, demonstrating that rate
spreads distinguish early delinquency
risk under a range of economic
conditions and creditor practices.
Analyses published in response to the
Bureau’s ANPR and RFIs are consistent
196 As in Tables 2 and 4, above, the 2018 data are
divided into larger bins to ensure enough loans per
bin. Loans with a DTI ratio greater than 50 percent
are excluded, as well as loans with a DTI ratio at
or below 25 percent and rate spreads of 1.5
percentage points and above, because these bins
contained fewer than 500 loans in the matched
2018 NMDB–HMDA sample.
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with the Bureau’s analysis showing that
early delinquency rates rise consistently
with rate spread. For example,
CoreLogic analyzes a set of 2018 HMDA
conventional mortgage originations
merged to loan performance data
collected from mortgage servicers.197
The CoreLogic analysis finds: (1) The
lowest delinquency rates among loans
with rate spreads that are below APOR,
and (2) increased early delinquency
rates for each sequentially higher bin of
rate spreads up to two percentage
points. In assessing the CoreLogic
analysis, the Bureau notes that loans
priced at or above two percentage points
over APOR in the 2018 HMDA data are
relatively rare and are
disproportionately made for
manufactured housing and smaller loan
amounts and therefore may not be well
represented in mortgage servicing
datasets. However, these loans also have
relatively high rates of delinquency.198
CoreLogic finds a similar, but more
variable, positive relationship between
rate spreads over APOR and
delinquency in earlier cohorts (2010–
2017) of merged HMDA-CoreLogic
originations, a period in which rate
spreads were only reported for loans
priced at least 1.5 percentage points
over APOR.199
Further, using loan performance data
from Black Knight, analyses by the
Urban Institute show a comparable
positive relationship between rate
spreads—measured there as the note
rate over Freddie Mac’s Primary
Mortgage Market Survey—and
delinquency.200 The analysis finds that
the relationship holds across a range of
loan types (conventional loans held in
portfolio, in GSE securitizations, and in
private securitizations; FHA loans; VA
loans) and years (1995–2018).
Additional analyses by the Urban
Institute show the same positive
197 See Archana Pradhan & Pete Carroll,
Expiration of the CFPB’s Qualified Mortgage (QM)
GSE Patch—Part V, LogicCore Insights Blog, (Jan.
13, 2020), https://www.corelogic.com/blog/2020/1/
expiration-of-the-cfpbs-qualified-mortgage-qm-gsepatch-part-v.aspx. Delinquency was measured as of
October 2019, so loans do not have two full years
of payment history.
198 The Bureau analyzes the performance and
pricing for smaller loans in the section-by-section
analysis for § 1026.43(e)(2)(vi).
199 See Archana Pradhan & Pete Carroll,
Expiration of the CFPB’s Qualified Mortgage (QM)
GSE Patch—Part IV, LogicCore Insights Blog, (Jan.
11, 2020), https://www.corelogic.com/blog/2020/1/
expiration-of-the-cfpbs-qualified-mortgage-qm-gsepatch-part-iv.aspx. Delinquency measured as of
October 2019.
200 See Karan Kaul & Laurie Goodman, Urban
Inst., Updated: What, If Anything, Should Replace
QM GSE Patch, (Oct. 2020), at 9, https://
www.urban.org/sites/default/files/publication/
99268/2018_10_30_qualified_mortgage_rule_
update_finalized_4.pdf.
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relationship between rate spread and
loan performance in Fannie Mae loanlevel performance data.201
Collectively, this evidence suggests
that higher rate spreads—including the
specific measure of APR over APOR—
are strongly correlated with early
delinquency rates. Given that early
delinquency captures consumers’
difficulty making required payments,
these rate spreads provide a proxy
measure for whether the terms of
mortgage loans reasonably reflect
consumers’ ability to repay at the time
of origination. The Bureau
acknowledges that a test that combines
rate spread and DTI may better predict
early delinquency rates than either
metric on its own. However, any rule
with a specific DTI limit would need to
provide standards for calculating the
income that may be counted and the
debt that must be counted so that
creditors and investors can ensure with
reasonable certainty that they have
accurately calculated DTI within the
specific DTI limit. As noted above and
discussed further below, the current
definitions of debt and income in
appendix Q have proven to be complex
in practice and may unduly restrict
access to credit. The Bureau has
concerns about whether other potential
approaches could define debt and
income with sufficient clarify while at
the same time providing flexibility to
accommodate new approaches to
verification and underwriting. As noted
in part V.E below, the Bureau is
requesting comment on whether the rule
should retain a specific DTI limit and,
if so, whether the Bureau’s proposed
approach to verification of income and
debt in § 1026.43(e)(2)(v) would provide
a workable method for defining debt
and income for a specific DTI limit. Part
V.E below requests comment on
whether certain aspects of proposed
§ 1026.43(e)(2)(v) could be applied to a
General QM loan definition that
includes a specific DTI limit.
In addition to strongly correlating
with loan performance, the Bureau
tentatively concludes that a price-based
QM definition, rather than conditioning
QM status on a specific DTI limit, is a
more holistic and flexible measure of a
consumer’s ability to repay. Mortgage
underwriting, and by extension, a loan’s
price, generally includes consideration
of a consumer’s DTI. However, loan
pricing also includes assessment of
additional factors, including LTV ratios,
credit scores, and cash reserves, that
might compensate for a higher DTI ratio
and that might also be probative of a
consumer’s ability to repay. One of the
primary criticisms of the current 43
percent DTI ratio is that it is too limited
in assessing a consumer’s finances and,
as such, may unduly restrict access to
credit for some consumers for whom it
might be appropriate to presume ability
to repay at consummation. Therefore, a
potential benefit of a price-based QM
definition is that a mortgage loan’s price
reflects credit risk based on many
factors, including DTI ratios, and may
be a more holistic measure of ability to
repay than DTI ratios alone. Further,
there is inherent flexibility for creditors
in a rate-spread-based QM definition,
which could facilitate innovation in
underwriting, including emerging
research into alternative mechanisms to
assess a consumer’s ability to repay,
such as cash flow underwriting.
Although the Bureau is proposing to
remove the 43 percent DTI limit in
§ 1026.43(e)(2)(vi), the Bureau continues
to believe that DTI is an important factor
for creditors to consider in evaluating
consumers’ ability to repay. As
discussed further in the section-bysection analysis of § 1026.43(e)(2)(v),
below, the Bureau is proposing to
require creditors to consider a
consumer’s DTI ratio or residual income
to satisfy the General QM loan
definition.
The Bureau also notes that there is
significant precedent for using the price
of a mortgage loan to determine whether
to apply additional consumer
protections, in recognition of the lower
risk generally posed by lower-priced
mortgages. A price-based General QM
loan definition would be consistent
with these existing provisions that
provide greater protections to
consumers with more expensive loans.
For example, TILA and Regulation Z use
a loan’s APR in comparison to APOR
and as one trigger for heightened
consumer protections for certain ‘‘highcost mortgages’’ pursuant to HOEPA.202
Loans that meet HOEPA’s high-cost
trigger are subject to special disclosure
requirements and restrictions on loan
terms, and consumers with high-cost
mortgages have enhanced remedies for
violations of the law. Further, in 2008,
the Board exercised its authority under
HOEPA to require certain consumer
protections concerning a consumer’s
ability to repay, prepayment penalties,
201 See Karan Kaul et al., Urban Inst., Comment
Letter to the Consumer Financial Protection Bureau
on the Qualified Mortgage Rule, (Sept. 2019), at 9–
10, https://www.urban.org/sites/default/files/
publication/101048/comment_letter_to_the_
consumer_financial_protection_bureau_0.pdf.
202 See TILA section 103(aa)(i); Regulation Z
§ 1026.32(a)(1)(i). TILA and Regulation Z also
provide a separate price-based coverage trigger
based on the points and fees charged on a loan. See
TILA section 130(aa)(ii); Regulation Z
§ 1026.32(a)(1)(ii).
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and escrow accounts for taxes and
insurance for a category of ‘‘higherpriced mortgage loans,’’ which have
APR spreads lower than those
prescribed for high-cost mortgages but
that nevertheless exceed APOR by a
specified threshold.203 Although the
ATR/QM Rule replaced the ability-torepay requirements promulgated
pursuant to HOEPA and the Board’s
2008 rule,204 higher-priced mortgage
loans remain subject to additional
requirements related to escrow accounts
for taxes and homeowners insurance
and to appraisal requirements.205 The
ATR/QM Rule itself provides additional
protection to QMs that are higher-priced
covered transactions, as defined in
§ 1026.43(b)(4), in the form of a
rebuttable presumption of compliance
with the ATR provisions, instead of a
conclusive safe harbor.
Finally, the Bureau preliminarily
concludes that a price-based General
QM loan definition would provide
compliance certainty to creditors, since
creditors would be able to readily
determine whether a loan is a General
QM loan. Creditors have experience
with APR calculations due to the
existing price-based regulatory
requirements described above, and for
various other disclosure and compliance
reasons under Regulation Z. Creditors
also have experience determining the
appropriate APOR for use in calculating
rate spreads. As such, the Bureau
believes this approach would provide
certainty to creditors regarding a loan’s
status as a QM.206
Although the proposal would require
creditors to consider the consumer’s
income, debt, and DTI ratio or residual
income, the proposal would not provide
a specific DTI limit. For the reasons
discussed below in the section-bysection analysis of § 1026.43(e)(2)(v)(A),
the Bureau preliminarily concludes that
it is appropriate to remove current
appendix Q and instead provide
creditors additional flexibility for
203 73
FR 44522 (July 30, 2008).
Board’s 2008 rule was superseded by the
January 2013 Final Rule, which imposed ability to
repay requirements on a broader range of closedend consumer credit transactions secured by a
dwelling. See generally 78 FR 6407 (Jan. 30, 2013).
205 See § 1026.35(b) and (c).
206 The Bureau understands from feedback that
creditors are concerned about errors in DTI
calculations and have previously requested that the
Bureau permit a cure of DTI overages that are
discovered after consummation. See 79 FR 25730,
25743–45 (May 6, 2014) (requesting comment on
potential cure or correction provisions for DTI
overages).
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204 The
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defining ‘‘debt’’ and ‘‘income.’’
Therefore, the Bureau is not proposing
to provide a single, specific set of
standards equivalent to appendix Q for
what must be counted as debt and what
may be counted as income for purposes
of proposed § 1026.43(e)(2)(v)(A). For
purposes of this proposed requirement,
income and debt would be determined
in accordance with proposed
§ 1026.43(e)(2)(v)(B), which requires the
creditor to verify the consumer’s current
or reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan, and
the consumer’s current debt obligations,
alimony, and child support. The
proposed rule would provide a safe
harbor to creditors using verification
standards the Bureau specifies. This
could potentially include relevant
provisions from Fannie Mae’s Single
Family Selling Guide, Freddie Mac’s
Single-Family Seller/Servicer Guide,
FHA’s Single Family Housing Policy
Handbook, the VA’s Lenders Handbook,
and the Field Office Handbook for the
Direct Single Family Housing Program
and Handbook for the Single Family
Guaranteed Loan Program of the U.S.
Department of Agriculture (USDA),
current as of the proposal’s public
release. However, under the proposal,
creditors would not be required to verify
income and debt according to the
standards the Bureau specifies. Rather,
the proposed rule would also provide
creditors with the flexibility to develop
other methods of compliance with the
verification requirements.
Under the proposal, a loan would
meet the General QM loan definition in
§ 1026.43(e)(2) only if the APR exceeds
APOR for a comparable transaction by
less than two percentage points as of the
date the interest rate is set. As described
below in the section-by-section analysis
of § 1026.43(e)(2)(vi), the Bureau
tentatively concludes that this threshold
would strike an appropriate balance
between ensuring that loans receiving
QM status may be presumed to comply
with the ATR provisions and ensuring
that access to responsible, affordable
mortgage credit remains available to
consumers. For these same reasons, the
Bureau is proposing higher thresholds
for smaller loans and subordinate-lien
transactions, as the Bureau is concerned
that loans with lower loan amounts may
be priced higher than larger loans, even
when the consumers have similar credit
characteristics and a similar ability to
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41735
repay. For all loans, regardless of loan
size, the Bureau is not proposing to alter
the current threshold separating safe
harbor from rebuttable presumption
QMs in § 1026.43(b)(4), under which a
loan is a safe harbor QM if its APR
exceeds APOR for a comparable
transaction by less than 1.5 percentage
points as of the date the interest rate is
set. As such, loans that otherwise meet
the General QM loan definition and for
which the APR exceeds APOR by 1.5 or
more percentage points (but by less than
2 percentage points) as of the date the
interest rate is set would receive a
rebuttable presumption of compliance
with the ATR provisions. This approach
is discussed further, below.
Finally, the Bureau notes its analysis
of the potential effects on access to
credit of a price-based approach to
defining a General QM loan. As
indicated by the various combinations
in Table 7 below, 2018 HMDA data
show that under the current rule—
including the Temporary GSE QM loan
definition, the General QM loan
definition with a 43 percent DTI limit,
and the Small Creditor QM loan
definition in § 1026.43(e)(5)—90.6
percent of conventional purchase loans
were safe harbor QM loans and 95.8
percent were safe harbor QM or
rebuttable presumption QM loans.
Under the proposed General QM rate
spread thresholds of 1.5 (safe harbor)
and 2 (rebuttable presumption)
percentage points over APOR, which are
described further, below, 91.6 percent of
conventional purchase loans would
have been safe harbor QM loans and
96.1 percent would have been safe
harbor QM or rebuttable presumption
QM loans.207 Based on these 2018 data,
rate spread thresholds of 1–2 percentage
points over APOR for safe harbor QM
loans would have covered 83.3 to 94.1
percent of the conventional purchase
market (as safe harbor QM loans), while
rate spread thresholds of 1.5–2.5
percentage points over APOR for
rebuttable presumption QM loans
would have covered 94.3 to 96.8 percent
of the conventional purchase market (as
safe harbor and rebuttable presumption
QM loans).
207 All estimates in Table 7 include loans that
meet the Small Creditor QM loan definition in
§ 1026.43(e)(5). In particular, loans originated by
small creditors that meet the criteria in
§ 1026.43(e)(5) are safe harbor QM loans if priced
below 3.5 percentage points over APOR or are
rebuttable presumption QM loans if priced 3.5
percentage points or more over APOR.
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TABLE 7—SHARE OF 2018 CONVENTIONAL FIRST-LIEN PURCHASE LOANS WITHIN VARIOUS PRICE-BASED SAFE HARBOR
(SH) QM AND REBUTTABLE PRESUMPTION (RP) QM DEFINITIONS (HMDA DATA)
Approach
Safe harbor QM
(share of
conventional
purchase market)
QM overall
(share of
conventional
purchase market)
90.6
91.6
74.6
83.3
88.4
89.8
90.5
93.1
94.1
95.8
96.1
94.3
94.3
95.3
96.1
96.1
96.6
96.8
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Temporary GSE QM + DTI 43 ....................................................................................................................
Proposal (SH 1.50, RP 2.00) .......................................................................................................................
SH 0.75, RP 1.50 ........................................................................................................................................
SH 1.00, RP 1.50 ........................................................................................................................................
SH 1.25, RP 1.75 ........................................................................................................................................
SH 1.35, RP 2.00 ........................................................................................................................................
SH 1.40, RP 2.00 ........................................................................................................................................
SH 1.75, RP 2.25 ........................................................................................................................................
SH 2.00, RP 2.50 ........................................................................................................................................
Despite the expected benefits of a
price-based General QM loan definition,
the Bureau acknowledges concerns
about the approach. First, while the
Bureau believes a loan’s price may be a
more holistic and flexible measure of a
consumer’s ability to repay than DTI
alone, the Bureau recognizes that there
is a distinction between credit risk,
which largely determines pricing
relative to the prime rate, and a
particular consumer’s ability to repay,
which is one component of credit risk.
Pricing is based on creditors’ expected
net revenues (i.e., whether a creditor
will earn interest payments and recover
the outstanding principal balance in the
event of default). While a consumer’s
ability to afford loan payments is an
important component of pricing, the
loan’s price will reflect additional
factors related to the loan that may not
in all cases be probative of the
consumer’s repayment ability. As noted
above, the proposal includes a
requirement to consider the consumer’s
DTI ratio or residual income as part of
the General QM loan definition, and to
verify the debt and income used to
calculate DTI or residual income,
because the Bureau believes these are
important factors in assessing a
consumer’s ability to repay. These
requirements are discussed further
below and in the section-by-section
analysis of § 1026.43(e)(2)(v).
The Bureau also acknowledges that
factors unrelated to the individual loan
can influence its price. Institutional
factors, such as the competing policy
considerations inherent in setting
guarantee fees on GSE loans, can
influence mortgage pricing
independently of credit risk or ability to
repay and would have some effect on
which loans would be priced under the
proposed General QM loan pricing
threshold. The price-based approach
also shifts the QM determination from a
DTI calculation, which is relatively
consistent across creditors and over
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time, to one which is more variable. An
identical loan to a consumer with the
same risk profile might satisfy the
requirements of the General QM loan
definition at one point in time but not
at another since APOR will change over
time. The Bureau also anticipates that a
price-based approach would incentivize
some creditors to price some loans just
below the threshold so that the loans
will receive the presumption of
compliance that comes with QM status.
While the Bureau acknowledges these
criticisms of a price-based approach, the
Bureau’s delinquency analyses and the
analyses by external parties discussed
above provide evidence that rate
spreads are correlated with
delinquency.
Finally, the Bureau is aware of
concerns about the sensitivity of a pricebased QM definition to macroeconomic
cycles. In particular, the Bureau is
aware of concerns that the price-based
approach would be a dynamic, trailing
indicator of risk and could be procyclical. For example, during periods of
economic expansion, increasing house
prices and strong demand from
consumers with weaker credit
characteristics often lead to greater
availability of credit, as secondary
market investors expect minimal losses,
regardless of whether the consumer
defaults, due to increasing collateral
values. This may result in an
underpricing of credit risk. To the
extent that occurs, rate spreads over
APOR would compress and additional
higher-priced, higher-risk loans would
fit within the proposed General QM
loan definition. Further, during periods
of economic downturn, investors’
demand for mortgage credit may fall as
they seek safer investments to limit
losses in the event of a broader
economic decline. This may result in
creditors reducing the availability of
mortgage credit to riskier borrowers,
through credit overlays and price
increases, to protect against the risk that
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creditors may be unable to sell the loans
profitably in the secondary markets, or
even sell the loans at all. While APOR
would also increase during periods of
economic stress and low secondary
market liquidity, consumers with riskier
credit characteristics may see
disproportionate pricing increases
relative to the increases in a more
normal economic environment. These
effects would likely make price-based
QM standards pro-cyclical, with a more
expansive QM market when the
economy is expanding, and a more
restrictive QM market when credit is
tight. As a result, a rate spread-based
QM threshold would likely be less
effective in limiting risky loans during
periods of strong housing price growth
or encouraging safe loans during periods
of weak housing price growth. The
Bureau is particularly concerned about
these potential effects given the recent
economic disruptions associated with
the COVID–19 pandemic. As described
in part V.E below, the Bureau is
requesting comment on an alternative,
DTI-based approach. Unlike a pricebased approach, a DTI-based approach
would be counter-cyclical, because of
the positive correlation between interest
rates and DTI ratios. The alternative
proposal is discussed in detail in part
V.E.
As noted above, stakeholders have
suggested a range of options to replace
the 43 percent DTI limit in the General
QM loan definition. The Bureau has
considered these options in developing
this proposed rule but is not providing
specific proposals for these alternatives
because the Bureau has preliminarily
concluded that the price-based
approach in proposed § 1026.43(e)(2)
would best achieve the statutory goals of
ensuring consumers’ ability to repay
and maintaining access to responsible,
affordable, mortgage credit. For
example, some stakeholders have
suggested that the Bureau rely only on
the statutory QM loan restrictions (i.e.,
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prohibitions on certain loan features,
requirements for underwriting, and a
limitation on points and fees) to define
a General QM loan. The Bureau is not
proposing this approach because it is
concerned that such an approach, which
would define a General QM loan
without either a direct or indirect
measure of the consumer’s finances,
may not adequately ensure that
consumers have a reasonable ability to
repay their loans according to the loan
terms.
Other stakeholders have suggested
that the Bureau retain DTI as part of the
General QM loan definition, but with
modifications to the current rule. Some
stakeholders have advocated for
increasing the DTI limit to some other
percentage to address concerns that the
43 percent DTI limit is too restrictive
and may exclude consumers for whom
it might be appropriate to presume
ability to repay for their loans at
consummation. Another stakeholder
suggested a hybrid approach that would
eliminate the DTI limit only for loans
below a set pricing threshold, such that
less expensive loans could obtain
General QM loan status by meeting the
statutory QM factors and more
expensive loans could be General QM
loans only if the consumer’s DTI ratio is
below a set threshold. This stakeholder
suggests that more expensive loans pose
greater risks to consumers, so it is
critical to include a DTI limit for such
loans. The Bureau recognizes these
concerns and, as explained in part V.E,
below, is requesting comment on
whether an alternative approach that
adopts a higher DTI limit or a hybrid
approach that combines pricing and a
DTI limit, along with a more flexible
standard for defining debt and income,
could provide a superior alternative to
the price-based approach. In particular,
the Bureau is requesting comment on
whether such an approach would
adequately balance considerations
related to ensuring consumers’ ability to
repay and maintaining access to credit,
which are described above.
Other stakeholders have advocated for
granting QM status to loans with DTI
ratios above a prescribed limit if certain
compensating factors are present, such
as credit score, LTV ratio, and cash
reserves. Similarly, another stakeholder
suggested the Bureau define General
QM loans by reference to a multi-factor
approach that combines DTI ratio, LTV
ratio, and credit score. The Bureau is
concerned about the complexity of these
approaches. In particular, these
approaches would present the same
challenges with defining debt and
income described above and would also
require the Bureau to define
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compensating factors and set applicable
thresholds for those factors. The Bureau
is concerned that incorporating
compensating factors into the General
QM loan definition would not provide
creditors adequate certainty about
whether a loan satisfies the
requirements of the General QM loan
definition, given that it would be
difficult to create a bright-line rule that
incorporates a range of compensating
factors. Further, the Bureau is
concerned that a rule that incorporates
only a few compensating factors might
cause the market to over-emphasize
those factors over others that might be
equally predictive of a consumer’s
ability to repay, potentially stifling
innovation and limiting access to credit.
The Bureau has decided not to propose
an approach that would combine a
specific DTI limit with compensating
factors.
The Bureau also acknowledges that
some stakeholders have requested that
the Bureau make the Temporary GSE
QM loan definition permanent. The
Bureau is not proposing this alternative
because it is concerned that there is not
a basis to presume for an indefinite
period that loans eligible to be
purchased or guaranteed by the GSEs—
whether or not the GSEs are under
conservatorship—have been originated
with appropriate consideration of
consumers’ ability to repay. Making the
Temporary GSE QM loan definition
permanent could stifle innovation and
the development of competitive privatesector approaches to underwriting. The
Bureau is also concerned that, as long as
the Temporary GSE QM loan definition
continues in effect, the non-GSE private
market is less likely to rebound, and
that the existence of the Temporary GSE
QM loan definition may be contributing
to the continuing limited non-GSE
private market.
The Bureau requests comment on all
aspects of the proposal to remove the
General QM loan definition’s specific
DTI limit in § 1026.43(e)(2)(vi) and
replace it with a with a price-based
threshold. In particular, the Bureau
requests comment, including data or
other analysis, on whether pricing is
predictive of loan performance and
whether the Bureau should consider
other requirements, in addition to a
price-based threshold, as part of the
General QM loan definition. The Bureau
also requests comment on whether and
to what extent the private market would
provide access to credit by originating
responsible, affordable mortgages that
would no longer receive QM status
when the Temporary GSE QM loan
definition expires, including loans with
DTI ratios above 43 percent. In addition,
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in light of the concerns about the
sensitivity of a price-based QM
definition to macroeconomic cycles, the
Bureau requests comment on whether it
should consider adjusting the pricing
thresholds in emergency situations and,
if so, how the Bureau should do so. The
Bureau also requests comment on how
revisions to the General QM loan
definition can support innovations in
underwriting that would facilitate
access to credit, while ensuring that
loans granted QM status are those that
should be presumed to comply with the
ATR provisions.
As noted, the Bureau is proposing to
require a creditor to consider a
consumer’s monthly DTI ratio or
residual income, which the Bureau
believes would help ensure that QMs
remain within a consumer’s ability to
repay without the need to set a specific
DTI limit. However, as discussed in
more detail in part V.E below, the
Bureau also specifically requests
comment on whether, instead of or in
addition to a price-based threshold, the
rule should retain a DTI limit as part of
the General QM loan definition or to
determine which loans receive a safe
harbor or a rebuttable presumption of
compliance.
D. The QM Presumption of Compliance
Under a Price-Based QM Definition
The Bureau is not proposing to alter
the approach in the current ATR/QM
Rule of providing a conclusive
presumption of compliance (i.e., a safe
harbor) to loans that meet the General
QM loan requirements in § 1026.43(e)(2)
and for which the APR exceeds APOR
for a comparable transaction by less
than 1.5 percentage points as of the date
the interest rate is set. Loans that meet
the General QM loan requirements in
§ 1026.43(e)(2), including the pricing
thresholds in § 1026.43(e)(2)(vi), and for
which the APR exceeds APOR for a
comparable transaction by 1.5
percentage points or more as of the date
the interest rate is set would receive a
rebuttable presumption of compliance.
Therefore, a loan that otherwise meets
the General QM loan definition would
receive a rebuttable presumption of
compliance with the ATR provisions if
the APR exceeds APOR between 1.5
percentage points and less than 2
percentage points as of the interest rate
is set. The proposal would provide a
rebuttable presumption of compliance
up to a higher pricing threshold for
smaller loans, depending on the loan
amount, and for subordinate-lien
transactions, as described further in the
section-by-section analysis of
§ 1026.43(e)(2)(vi).
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Under the ATR/QM Rule, a creditor
that makes a QM loan receives either a
rebuttable or conclusive presumption of
compliance with the ATR provisions,
depending on whether the loan is a
higher-priced covered transaction. The
Rule generally defines higher-priced
covered transaction in § 1026.43(b)(4) to
mean a first-lien mortgage with an APR
that exceeds APOR for a comparable
transaction as of the date the interest
rate is set by 1.5 or more percentage
points; or a subordinate-lien transaction
with an APR that exceeds APOR for a
comparable transaction as of the date
the interest rate is set by 3.5 or more
percentage points.208 The Rule provides
in § 1026.43(e)(1)(i) that a creditor that
makes a QM loan that is not a higherpriced covered transaction is entitled to
a safe harbor from liability under the
ATR provisions. Under
§ 1026.43(e)(1)(ii), a creditor that makes
a QM loan that is a higher-priced
covered transaction is entitled to a
rebuttable presumption that the creditor
has complied with the ATR provisions.
In developing the approach to the
presumptions of compliance for QMs in
the January 2013 Final Rule, the Bureau
first considered whether the statute
prescribes if QM loans receive a
conclusive or rebuttable presumption of
compliance with the ATR provisions.
As discussed above, TILA section
129C(b) provides that loans that meet
certain requirements are ‘‘qualified
mortgages’’ and that creditors making
QMs ‘‘may presume’’ that such loans
have met the ATR requirements.
However, the statute does not specify
whether the presumption of compliance
means that the creditor receives a
conclusive presumption or a rebuttable
presumption of compliance with the
ATR provisions. The Bureau noted that
its analysis of the statutory construction
and policy implications demonstrates
that there are sound reasons for
adopting either interpretation.209 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.210 The Bureau interpreted the
statute to provide for a rebuttable
presumption of compliance with the
ATR provisions but used its adjustment
and exception authority to establish a
conclusive presumption of compliance
for loans that are not ‘‘higher-priced
covered transactions.’’ 211
In the January 2013 Final Rule, the
Bureau identified several reasons why
loans that are not higher-priced loans
(generally prime loans) should receive a
safe harbor. The Bureau noted that the
fact that a consumer receives a prime
rate is itself indicative of the absence of
any indicia that would warrant a loan
level price adjustment, and thus is
suggestive of the consumer’s ability to
repay.212 The Bureau noted that prime
rate loans have performed significantly
better historically than subprime loans
and that the prime segment of the
market has been subject to fewer
abuses.213 The Bureau noted that the
QM requirements will ensure that the
loans do not contain certain risky
product features and are underwritten
with careful attention to consumers’ DTI
ratios.214 The Bureau also noted that a
safe harbor provides greater legal
certainty for creditors and secondary
market participants and may promote
enhanced competition and expand
access to credit.215 The Bureau
determined that if a loan met the
product and underwriting requirements
for QM and was not a higher-priced
covered transaction, there are sufficient
grounds for concluding that the creditor
satisfied the ATR provisions.216
The Bureau in the January 2013 Final
Rule pointed to factors to support its
decision to adopt a rebuttable
presumption for QMs that are higherpriced covered transactions. The Bureau
noted that QM requirements, including
the restrictions on product features and
the 43 percent DTI limit, would help
prevent the return of the lax lending
practices prevalent in the years before
the financial crisis, but that it is not
possible to define by a bright-line rule
a class of mortgages for which each
consumer will have ability to repay,
particularly for subprime loans.217 The
Bureau noted that subprime pricing is
often the result of loan level price
adjustments established by the
secondary market and calibrated to
default risk.218 The Bureau also noted
that consumers in the subprime market
tend to be less sophisticated and have
fewer options and thus are more
susceptible to predatory lending
practices.219 The Bureau noted that
subprime loans have performed
211 Id.
212 Id.
208 Section 1026.43(b)(4) also provides that a firstlien covered transaction that is a QM under
§ 1026.43(e)(5), (e)(6), or § 1026.43(f) is ‘‘higher
priced’’ if its APR is 3.5 percentage points or more
above APOR.
209 78 FR 6408, 6507 (Jan. 30, 2013).
210 Id. at 6511.
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at 6514.
at 6511.
213 Id.
214 Id.
215 Id.
216 Id.
considerably worse than prime loans.220
The Bureau therefore concluded that
QMs that are higher-priced covered
transactions would receive a rebuttable
presumption of compliance with the
ATR provisions. The Bureau recognized
that this approach could modestly
increase the litigation risk for subprime
QMs but did not expect that imposing
a rebuttable presumption for higherpriced QMs would have a significant
impact on access to credit.221
The Bureau is not proposing to alter
this general approach to the
presumption of compliance.
Specifically, the Bureau is not
proposing to amend the approach under
the current rule, in which General QM
loans that are higher-priced covered
transactions (up to the pricing
thresholds set out in proposed
§ 1026.43(e)(2)(vi)) receive a rebuttable
presumption of compliance with the
ATR requirements and General QM
loans that are not higher-priced covered
transactions receive a safe harbor. As
discussed above, the Bureau has
preliminarily concluded that pricing is
strongly correlated with loan
performance and that pricing thresholds
should be included in the General QM
loan definition in § 1026.43(e)(2). The
Bureau preliminarily concludes that for
prime loans, the pricing, in conjunction
with the revised QM requirements in
proposed § 1026.43(e)(2), provides
sufficient grounds for supporting a
conclusive presumption that the
creditor complied with the ATR
requirements. The Bureau recognizes
that the January 2013 Final Rule relied
in part on the 43 percent DTI limit to
support its conclusion that a safe harbor
is appropriate for QMs that are not
higher-priced covered transactions.
However, the Bureau believes that a
specific DTI limit may not be necessary
to support a decision to preserve the
conclusive presumption, provided that
the pricing threshold identified for the
conclusive presumption is sufficiently
low. As noted above, pricing is strongly
correlated with loan performance, and
the specific 43 percent DTI limit has
been problematic, both because of the
difficulties of calculating DTI with
appendix Q and because, while DTI
ratios in general may also be correlated
with loan performance, the bright-line
43 percent threshold may unduly
restrict access to credit for some
consumers for whom it might be
appropriate to presume ability to repay
at consummation. Further, under the
proposed price-based approach,
creditors would be required to consider
217 Id.
218 Id.
220 Id.
219 Id.
221 Id.
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DTI or residual income for a loan to
satisfy the requirements of the General
QM loan definition. Moreover, the other
factors noted above appear to continue
supporting a safe harbor for prime QMs,
including the better performance of
prime loans compared to subprime
loans, and the potential benefits of
greater competition and access to credit
from the greater certainty and reduced
litigation risk arising from a safe harbor.
The Bureau is not proposing to alter
the current safe harbor thresholds for
General QM loans under § 1026.43(e)(2).
Under current § 1026.43(b)(4) and
(e)(1)(i), a first-lien transaction that is a
General QM loan under § 1026.43(e)(2)
receives a safe harbor from liability
under the ATR provisions if a loan’s
APR exceeds APOR for a comparable
transaction by less than 1.5 percentage
points as of the date the interest rate is
set. Current paragraphs (b)(4) and
(e)(1)(i) of § 1026.43 provide a separate
safe harbor threshold of 3.5 percentage
points for subordinate-lien transactions.
The Bureau is also not proposing to
amend that threshold.222
As explained above, the Bureau’s
January 2013 Final Rule generally
viewed loans with APRs that did not
exceed APOR by more than 1.5
percentage points (and 3.5 percentage
points for subordinate-lien transactions)
to be prime loans which, if the loan
satisfies the criteria to be a QM, may be
conclusively presumed to comply with
the ATR provisions. In support of
providing a conclusive presumption of
compliance to prime loans, the Bureau
cited the absence of loan level price
adjustments for those loans (which the
Bureau viewed as indicative of the
consumer’s ability to repay), the
historical performance of prime rate
loans compared to subprime loans, and
historically fewer abusive practices in
the prime market.223 With respect to the
specific thresholds chosen to separate
safe harbor from rebuttable presumption
QM loans, the Bureau in the January
2013 Final Rule noted that the line it
was drawing had long been recognized
as a rule of thumb to separate prime
loans from subprime loans.224 The 1.5
percentage point above APOR threshold
is the same as that used in the Board’s
2008 HOEPA Final Rule, described
above, which was amended by the
Board’s 2011 Jumbo Loans Escrows
Final Rule to include a separate
222 As noted above, the Bureau is not proposing
to alter the higher threshold of 3.5 percentage
points over APOR for small creditor portfolio QMs
and balloon-payment QMs made by certain small
creditors pursuant to § 1026.43(e)(5), (e)(6) and (f).
See § 1026.43(b)(4).
223 78 FR 6408, 6511 (Jan. 30, 2013).
224 Id. at 6408.
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threshold for jumbo loans for purposes
of certain escrows requirements.225
Subsequently, the Dodd-Frank Act
adopted these same thresholds in TILA
section 129C(a)(6)(D)(ii)(II), which
provides that a creditor making a
balloon-payment loan with an APR at or
above certain thresholds must
determine ability to repay using the
contract’s repayment schedule.226 The
Bureau concluded that a 1.5 percentage
point threshold for first-lien QMs and
3.5 percentage point threshold for
subordinate-lien QMs balanced
competing consumer protection and
access to credit considerations.227 The
Bureau also concluded that it was not
appropriate to extend the safe harbor to
first-lien loans above those thresholds
because that approach would provide
insufficient protection to consumers in
loans with higher interest rates who
may require greater protection than
consumers in prime rate loans.228
For the reasons set forth below, the
Bureau is not proposing to alter the safe
harbor threshold of 1.5 percentage
points for first-lien General QM loans
under the price-based approach in
proposed § 1026.43(e)(2). The Bureau
tentatively concludes that the current
safe harbor threshold of 1.5 percentage
points for first liens is appropriate to
restrict safe harbor QMs to lower-priced,
generally less risky, loans while
ensuring that responsible, affordable
credit remains available to consumers.
The Bureau generally believes these
same considerations support not
changing the current safe harbor
threshold of 3.5 percentage points for
subordinate-lien transactions, which
generally perform better and have
stronger credit characteristics than firstlien transactions. The Bureau’s proposal
to address subordinate-lien transactions
is discussed further below in the
section-by-section analysis of
§ 1026.43(e)(2)(vi).
As explained above, the Bureau uses
early delinquency rates as a proxy for
measuring whether a consumer had
ability to repay at the time the mortgage
loan was originated. Here, the Bureau
analyzed early delinquency rates in
considering whether it should propose
to revise the threshold for first-lien safe
harbor General QM loans under the
proposed price-based approach; that is,
which first-lien General QM loans
should be conclusively presumed to
comply with the ATR provisions in the
absence of a specific DTI limit. As noted
225 Id. at 6451; see also 76 FR 11319 (Mar. 2,
2011) (2011 Jumbo Loans Escrows Final Rule).
226 78 FR 6408, 6451 (Jan. 30, 2013).
227 Id. at 6514.
228 Id.
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above, the January 2013 Final Rule
relied in part on the 43 percent DTI
limit to support its conclusion that a
safe harbor is appropriate for QMs that
are not higher-priced covered
transactions. Under the proposal to
replace the current 43 percent DTI limit
with a price-based approach, some loans
with DTI ratios above 43 percent will
receive safe harbor QM status.
The Bureau compared projected early
delinquency rates under the General
QM loan definition with and without a
43 percent DTI limit under a range of
potential rate-spread based safe harbor
thresholds. Under the current 43
percent DTI limit for first-lien General
QM loans, Table 5 (2002–2008), above,
indicates early delinquency rates for
loans with rate spreads just below 1.5
percentage points increase with DTI,
from 6 percent for loans with a DTI ratio
of 20 percent or below to 11 percent for
loans with DTI ratios from 41 to 43
percent. For loans with rate spreads just
below 1.5 percentage points and DTI
ratios above 43 percent, Table 5
indicates early delinquency rates
between 12 percent (for loans with 44 to
45 percent DTI ratios) and 15 percent
(for loans with DTI ratios of 61 to 70
percent). The loans at that rate spread
with DTI ratios above 43 percent in
Table 5 are loans that are not QMs
under the current General QM loan
definition in § 1026.43(e)(2) because of
the 43 percent DTI limit, but that would
be QMs under the proposed General QM
loan definition in § 1026.43(e)(2) in the
absence of the 43 percent DTI limit.
Therefore, the loans that would be
newly granted safe harbor status under
the proposed price-based approach at a
safe harbor threshold of 1.5 percentage
points are likely to have a somewhat
higher early delinquency rate than those
just at or below 43 percent DTI ratios,
12 to 15 percent versus 11 percent. The
comparable early delinquency rates for
2018 loans from Table 6 also show a
slightly higher early delinquency rate
for DTI ratios above 43 percent
compared to loans with DTI ratios of 36
to 43 percent: 2.3 percent versus 1.5
percent.
The Bureau acknowledges that
removing the 43 percent DTI limit while
retaining a 1.5 percentage point safe
harbor threshold would lead to
somewhat higher-risk loans obtaining
safe harbor QM status relative to loans
within the current General QM loan
definition. However, Bureau analysis
shows the early delinquency rate for
this set of loans is on par with loans that
have received safe harbor QM status
under the Temporary GSE QM loan
definition. Restricting the sample of
2018 NMDB–HMDA matched first-lien
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conventional purchase originations to
only those purchased and guaranteed by
the GSEs, loans with DTI ratios above 43
and rate spreads between 1 and 1.49
percentage points had an early
delinquency rate of 2.4 percent.229
Consequently, the Bureau does not
believe that the price-based alternative
would result in substantially higher
delinquency rates than the standard
included in the current rule.
The Bureau also considered
continued access to responsible,
affordable mortgage credit in deciding
not to propose revisions to the current
1.5 percentage point safe harbor
threshold. The Bureau is concerned that
a safe harbor threshold lower than 1.5
percentage points could reduce access
to credit, as some loans that are General
QM loans under current § 1026.43(e)(2)
and receive a safe harbor would instead
receive a rebuttable presumption of
compliance under proposed
§ 1026.43(e)(2). HMDA data analyzed by
the Bureau in the Assessment Report
suggest that the safe harbor threshold of
1.5 percentage points has not
constrained lenders, as the share of
originations above the threshold
remained steady after the
implementation of the ATR/QM Rule.230
However, the Report noted that these
results are likely explained by the fact
that, since the Board’s issuance of a rule
in 2008, an ability-to-repay requirement
has applied to a category of mortgage
loans that is substantially the same as
rebuttable presumption QMs under the
January 2013 Final Rule.231 The Bureau
is concerned about the potential effects
on access to credit if the threshold is
lowered, as loans that are newly subject
to the rebuttable presumption rather
than the safe harbor may cost materially
more to consumers. For example, the
Bureau is concerned that some loans
that would have been originated as
conventional mortgages may instead be
originated as FHA loans, which the
Bureau expects would cost materially
more for many consumers. The Bureau
expects that a safe harbor threshold of
229 This comparison uses 2018 data on GSE
originations because such loans were originated
while the Temporary GSE QM loan definition was
in effect and the GSEs were in conservatorship. GSE
loans from the 2002 to 2008 period were originated
under a different regulatory regime and with
different underwriting practices (e.g., GSE loans
more commonly had DTI ratios over 50 percent
during the 2002 to 2008 period), and thus may not
be directly comparable to loans made under the
Temporary GSE QM loan definition.
230 Assessment Report, supra note 58, section 5.5,
at 187.
231 Id. at 182. The Assessment Report explained
that because of their nearly identical definitions,
higher-priced mortgage loans (HPMLs) may serve as
a proxy for higher-priced covered transactions
under the ATR/QM Rule in analysis of HMDA data.
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1.5 percentage points over APOR for
first liens under a price-based General
QM loan definition would not have an
adverse effect on access to credit. In
particular, the Bureau estimates that the
size of the safe harbor QM market would
be comparable to the size of that market
with the Temporary GSE QM loan
definition in place and may expand
slightly under the proposed
amendments to the General QM loan
definition in § 1026.43(e)(2), if the rule
retains the current safe harbor
threshold.232
As discussed above and in the January
2013 Final Rule, TILA does not plainly
mandate either a safe harbor or a
rebuttable presumption approach to a
QM presumption of compliance.233
With respect to General QM prime loans
(General QM loans with an APR that
does not exceed APOR by 1.5 or more
percentage points for first liens), the
Bureau preliminarily concludes that it is
appropriate to use its adjustment
authority under TILA section 105(a) to
retain a conclusive presumption (i.e., a
safe harbor). The Bureau preliminarily
concludes that this approach would
balance the competing consumer
protection and access to credit
considerations described above. The
Bureau acknowledges that, under the
price-based approach in proposed
§ 1026.43(e)(2), General QM loans
would not be limited to those with DTI
ratios that do not exceed 43 percent, as
is the case under the current rule.
However, the Bureau preliminarily
concludes that it remains appropriate to
provide a safe harbor to these loans. The
Bureau has recognized that receipt of a
prime rate is suggestive of a consumer’s
ability to repay.234 Further, the Bureau
notes that proposed § 1026.43(e)(2)(v)
would impose new requirements for the
creditor to consider the consumer’s
income, debt, and monthly debt-toincome ratio or residual income to
satisfy the General QM loan definition,
thus retaining a requirement that the
creditor consider key aspects of the
consumer’s financial capacity. The
Bureau is not proposing to extend the
safe harbor to higher-priced loans
232 The Bureau estimates that 90.9 percent of
conventional purchase loans in 2018 HMDA data
fell within safe harbor QM status under the current
rule with the Temporary GSE QM loan definition.
The Bureau estimates that under the proposed
changes to the General QM loan definition in
§ 1026.43(e)(2), 91.9 percent of those conventional
purchase loans would have had safe harbor QM
status if the current safe harbor threshold of 1.5
percentage points remains in place. Therefore, the
Bureau expects that the proposed changes would
result in a comparable, or somewhat increased,
portion of the QM share of the market that would
be protected by the safe harbor.
233 78 FR 6408, 6513 (Jan. 30, 2013).
234 Id. at 6511.
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because the Bureau preliminarily
concludes that such an approach would
provide insufficient protection to
consumers in loans with higher interest
rates who may require greater protection
than consumers in prime rate loans. The
Bureau preliminarily concludes that
providing a safe harbor for prime 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 requests comment on
whether the rule should retain the
current thresholds separating safe
harbor from rebuttable presumption
General QM loans and specifically
requests feedback on whether the
Bureau should adopt higher or lower
safe harbor thresholds. The Bureau
encourages commenters to suggest
specific rate spread thresholds for the
safe harbor. In particular, the Bureau
requests comment on whether it may be
appropriate to set the safe harbor
threshold for first-lien transactions
lower than 1.5 percentage points over
APOR in light of the comparatively
lower delinquency rates associated with
high-DTI loans at lower rate spreads, as
reflected in Tables 5 and 6.
The Bureau acknowledges that
adopting a threshold below 1.5
percentage points over APOR could
have some negative impact on access to
credit, as some loans that are General
QM loans under current § 1026.43(e)(2)
and receive a safe harbor would instead
receive a rebuttable presumption of
compliance under proposed
§ 1026.43(e)(2). The Bureau similarly
requests comment on whether it may be
appropriate to set the safe harbor
threshold for first liens higher than 1.5
percentage points over APOR. The
Bureau acknowledges that some
commenters to the ANPR suggested that
the current safe harbor threshold is too
low and may have an adverse impact on
access to credit, including for minority
consumers. At the same time, the
Bureau notes its concern about higher
early delinquency rates at higher safe
harbor thresholds and is concerned that
such an approach might result in safe
harbors for loans for which it would not
be appropriate to presume conclusively
that consumers have a reasonable ability
to repay their loans according to the
loan terms. The Bureau requests
comment on whether a safe harbor
threshold of 2 percentage points over
APOR would balance considerations
regarding access to credit and ability to
repay. For commenters that recommend
a safe harbor threshold higher than 1.5
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percentage points over APOR (such as a
2-percentage point threshold), the
Bureau requests comment on an
appropriate threshold to separate QM
loans from non-QM loans. As discussed
in the section-by-section analysis of
§ 1026.43(e)(2)(vi), below, the Bureau is
proposing that loans with rate spreads
between 1.5 and less than 2 percentage
points over APOR receive a rebuttable
presumption of compliance with the
ATR provisions, and that loans with rate
spreads of 2 percentage points over
APOR or higher would not meet the
General QM loan definition.
Commenters are encouraged to provide
data or other material to support their
recommendations, as well as
suggestions for commentary that would
assist in understanding the application
of the thresholds.
With respect to General QM loans that
are higher-priced covered transactions
the Bureau preliminarily concludes that
such loans should receive a rebuttable
presumption of compliance with the
ATR requirements. Such loans would
have to satisfy the revised QM
requirements of § 1026.43(e)(2), and so
would be prevented from including
risky features and would be priced only
moderately above prime loans.
Accordingly, the Bureau preliminarily
concludes that a rebuttable presumption
of compliance is warranted for such
loans. This approach may strike an
appropriate balance between the access
to credit benefits that arise from
providing a greater degree of certainty
that such loans comply with the ATR
requirements and the consumer
protections that stem from permitting
consumers the opportunity to rebut the
presumption of compliance.
The Bureau is not proposing to revise
§ 1026.43(e)(1)(ii)(B), which defines the
grounds on which the presumption of
compliance that applies to higher-priced
QMs can be rebutted. Section
1026.43(e)(1)(ii)(B) provides that a
consumer may rebut the presumption by
showing that, at the time the loan was
originated, the consumer’s income and
debt obligations left insufficient residual
income or assets to meet living
expenses. The analysis considers the
consumer’s monthly payments on the
loan, mortgage-related obligations, and
any simultaneous loans of which the
creditor was aware, as well as any
recurring, material living expenses of
which the creditor was aware.
The Bureau stated in the January 2013
Final Rule that this standard was
sufficiently broad to provide consumers
a reasonable opportunity to demonstrate
that the creditor did not have a good
faith and reasonable belief in the
consumer’s repayment ability, despite
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meeting the prerequisites of a QM. At
the same time, the Bureau stated that it
believed the standard was sufficiently
clear to provide certainty to creditors,
investors, and regulators about the
standards by which the presumption
can successfully be challenged in cases
where creditors have correctly followed
the QM requirements. The Bureau also
noted that the standard was consistent
with the standard in the 2008 HOEPA
Final Rule.235 Commentary to that rule
provides, as an example of how its
presumption may be rebutted, that the
consumer could show ‘‘a very high debtto-income ratio and a very limited
residual income . . . depending on all
of the facts and circumstances.’’ 236 The
Bureau noted that, under the definition
of QM that the Bureau was adopting, the
creditor was generally not entitled to a
presumption if the consumer’s DTI ratio
was ‘‘very high.’’ The Bureau stated
that, as a result, the Bureau was
focusing the standard for rebutting the
presumption in the January 2013 Final
Rule on whether, despite meeting a DTI
test, the consumer nonetheless had
insufficient residual income to cover the
consumer’s living expenses.237
The Bureau is not proposing to
change the standard for rebutting the
presumption of compliance because it
believes the existing standard continues
to balance the consumer protection and
access to credit considerations
described above appropriately. For
example, the Bureau is not amending
the presumption of compliance to
provide that the consumer may use the
DTI ratio to rebut the presumption of
compliance by establishing that the DTI
ratio is very high, or by establishing that
the DTI ratio is very high and that the
residual income is not sufficient. First,
the Bureau tentatively determines that
permitting the consumer to rebut the
presumption by establishing that the
DTI ratio is very high is not necessary
because the existing rebuttal standard
already incorporates an examination of
the consumer’s actual income and debt
obligations (i.e., the components of the
DTI ratio) by providing the consumer
the option to show that the consumer’s
residual income—which is calculated
using the same components—was
insufficient at consummation.
at 6512.
Regulation Z comment 34(a)(4)(iii)–1.
237 78 FR 6408, 6511–12 (Jan. 30, 2013). The
Bureau in the January 2013 Final Rule stated that
it interpreted TILA section 129C(b)(1) to create a
rebuttable presumption of compliance, but
exercised its adjustment authority under TILA
section 105(a) to limit the ability to rebut the
presumption because the Bureau found that an
open-ended rebuttable presumption would unduly
restrict access to credit without a corresponding
benefit to consumers. Id. at 6514.
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236 See
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41741
Accordingly, the Bureau anticipates that
the addition of DTI ratio to the rebuttal
standard would not add probative value
beyond the current residual income test
in § 1026.43(e)(1)(ii)(B). Second, the
Bureau anticipates that the addition of
DTI ratio as a ground to rebut the
presumption of compliance would
undermine compliance certainty to
creditors and the secondary market
without providing any clear benefit to
consumers. The Bureau tentatively
determines that the rebuttable
presumption standard would continue
to be sufficiently broad to provide
consumers a reasonable opportunity to
demonstrate that the creditor did not
have a good faith and reasonable belief
in the consumer’s repayment ability,
despite meeting the prerequisites of a
QM. The Bureau requests comment on
its tentative determination not to amend
the grounds on which the presumption
of compliance can be rebutted. The
Bureau also requests comment on
whether to amend the grounds on which
the presumption of compliance can be
rebutted, such as where the consumer
has a very high DTI and low residual
income. To the extent commenters
suggest that the Bureau should amend
the grounds on which to rebut the
presumption to add instances of a
consumer having very high DTI, the
Bureau requests comment on whether
and how to define ‘‘very high DTI.’’
The Bureau requests comment on all
aspects of the proposed approach for the
presumption of compliance. In
particular, the Bureau requests
comment, including data or other
analysis, on whether a safe harbor for
QMs that are not higher priced is
appropriate and, if so, on whether other
requirements should be imposed for
such QMs to receive a safe harbor.
E. Alternative to the Proposed PriceBased QM Definition: Retaining a DTI
Limit
Although the Bureau is proposing to
remove the 43 percent DTI limit and
adopt a price-based approach for the
General QM loan definition, the Bureau
requests comment on an alternative
approach that retains a DTI limit, but
raises it above the current limit of 43
percent and provides a more flexible set
of standards for verifying debt and
income in place of appendix Q.
As discussed above, the Bureau is
proposing to remove the 43 percent DTI
limit because it is concerned that, after
the expiration of the Temporary GSE
QM loan definition, the 43 percent DTI
limit would result in a significant
reduction in the size of QM and
potentially could result in a significant
reduction in access to credit. The
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Bureau proposes to move away from a
DTI-based approach because it is
concerned that imposing a DTI limit as
a condition for QM status under the
General QM loan definition may be
overly burdensome and complex in
practice and may unduly restrict access
to credit because it provides an
incomplete picture of the consumer’s
financial capacity. The Bureau is
proposing to remove appendix Q
because its definitions of debt and
income are rigid and difficult to apply
and do not provide the level of
compliance certainty that the Bureau
anticipated at the time of the January
2013 Final Rule. As noted above, the
Bureau is proposing a price-based
General QM loan definition because it
preliminarily concludes that a loan’s
price, as measured by comparing a
loan’s APR to APOR for a comparable
transaction, is a strong indicator of a
consumer’s ability to repay and is a
more holistic and flexible measure of a
consumer’s ability to repay than DTI
alone.
At the same time, the Bureau
acknowledges concerns about a pricebased approach, as described in part V,
above. In particular, the Bureau
acknowledges the sensitivity of a pricebased QM definition to macroeconomic
cycles, including concerns that the
price-based approach could be procyclical, with a more expansive QM
market when the economy is expanding,
and a more restrictive QM market when
credit is tight. The Bureau is especially
concerned about these potential effects
given the recent economic disruptions
associated with the COVID–19
pandemic. If the QM market were to
contract, the Bureau would be
concerned about a reduction in access to
credit because of the modest amount of
non-QM lending identified in the
Bureau’s Assessment Report, which the
Bureau understands has declined
further in recent months. The Bureau
also acknowledges that a small share of
loans that satisfy the current General
QM loan definition would lose QM
status under the proposed price-based
approach due to the loan’s rate spread
exceeding the applicable threshold.
For these reasons, the Bureau requests
comment on whether an approach that
increases the DTI limit to a specific
threshold within a range of 45 to 48
percent and that includes more flexible
definitions of debt and income would be
a superior alternative to a price-based
approach.238 As discussed above, the
238 The Bureau acknowledges that some loans
currently originated as Temporary GSE QM loans
have higher DTI ratios. However, the Bureau is
concerned about adopting a DTI limit above a range
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January 2013 Final Rule incorporated
DTI as part of the General QM loan
definition because the Bureau believed
the QM criteria should include a
standard for evaluating the consumer’s
ability to repay, in addition to the
product-feature restrictions and other
requirements that are specified in TILA.
The Bureau has acknowledged that DTI
is predictive of loan performance, and
some commenters responding to the
ANPR advocated for retaining a DTI
limit as part of the General QM loan
definition, arguing that it is a strong
indicator of a consumer’s ability to
repay. The Bureau adopted a specific
DTI limit as part of the General QM loan
definition to provide certainty to
creditors that a loan is in fact a QM.239
The Bureau also provided a specific DTI
limit to give certainty to assignees and
investors in the secondary market,
because the Bureau believed such
certainty would help reduce possible
concerns regarding risk of liability and
promote credit availability.240
Numerous commenters on the 2011
Proposed Rule and comments submitted
subsequent to publication of the January
2013 Final Rule have highlighted the
value of providing objective
requirements that creditors can identify
and apply based on information
contained in loan files. Unlike a pricebased approach, a DTI-based approach
would be counter-cyclical, because of
the positive correlation between interest
rates and DTI ratios. Consumers’
monthly payments on their debts—the
numerator in DTI—will be higher when
interest rates and home prices are high,
leading to a more restrictive QM market.
By contrast, DTI ratios will be lower
when interest rates and home prices are
lower, leading to a more expansive QM
market.
The Bureau is proposing to remove
the 43 percent DTI limit and appendix
Q, based in substantial part on concerns
about access to credit and the challenges
associated with using appendix Q to
define income and debt, and to adopt a
price-based approach for the General
QM loan definition. However, the
Bureau requests comment on whether
an alternative approach that adopts a
higher DTI limit and a more flexible
standard for defining debt and income
could mitigate these concerns and
provide a superior alternative to the
price-based approach. In particular, the
of 45 to 48 percent without a requirement to
consider compensating factors. The Bureau is
concerned about the complexity of approaches to
the General QM loan definition that incorporate
compensating factors, as explained in part V.C,
above.
239 78 FR 6408 at 6526–27.
240 Id.
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Bureau requests comment on whether
such an approach would adequately
balance considerations related to
ensuring consumers’ ability to repay
and maintaining access to credit.
As described above, the Bureau uses
early delinquency (measured by
whether a consumer was ever 60 or
more days past due within the first 2
years after origination) as a proxy for the
likelihood of a lack of consumer ability
to repay at consummation across a wide
pool of loans. The Bureau’s analyzed the
relationship between DTI ratios and
early delinquency, using data on firstlien conventional purchase originations
from the NMDB, including a matched
sample of NMDB and HMDA loans.
That analysis, as shown in Tables 3 and
4 above, shows that early delinquency
rates increase consistently with DTI
ratio. This relationship is like the
pattern shown in the Bureau’s analysis
of early delinquency rates by rate
spread. For 2002–2008 originations, as
shown in Table 3, there was a 7 percent
early delinquency rate for loans with
DTI ratios between 44 and 48 percent.
For the sample of 2018 originations in
the NMDB matched to HMDA data, as
shown in Table 4, there was a 0.9
percent early delinquency rate for loans
with DTI ratios between 44 and 50
percent.
Tables 5 and 6 show the early
delinquency rates of these same samples
categorized according to both their DTI
and their rate spreads. Table 5, which
shows early delinquency rates for the
2002–2008 data, shows early
delinquency rates as high as 19 percent
for loans with DTI ratios between 46
and 48 percent that are priced between
2 and 2.24 percentage points over
APOR. This approximates the loans
with the highest DTI and pricing that
would be QMs under this alternative.
For comparison, as discussed in the
section-by-section analysis of
§ 1026.43(e)(2)(vi), the highest early
delinquency rates for loans within the
current General QM loan definition is
16 percent (DTI ratios of 41 to 43
percent and priced 2 percentage points
or more over APOR) and the highest
early delinquency rates for loans within
the General QM loan definition under
the proposed price-based approach is 22
percent (DTI ratios of 61 to 70 percent
priced between 1.75 and 1.99
percentage points over APOR).
Table 6, which shows early
delinquency rates for the 2018 sample,
allows a similar comparison for 2018
originations. Table 6 shows early
delinquency rates of 4.2 percent for
loans with DTI ratios between 44 and 50
percent that are priced 2 percentage
points or more above APOR. However,
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the highest early delinquency rates for
loans within the current General QM
loan definition or the alternative is 4.4
percent (DTI ratios of 26 to 35 percent
and priced 2 percentage points or more
over APOR). The highest early
delinquency rates for loans within the
General QM loan definition under the
proposed price-based approach is 3.2
percent (DTI ratios of 26 to 35 percent
priced between 1.5 and 1.99 percentage
points over APOR).
The Bureau has also analyzed the
potential effects of a DTI-based
approach on the size of QM and
potentially on access to credit. As
indicated in Table 8 below, 2018 HMDA
data show that with the Temporary GSE
QM loan definition and the General QM
loan definition with a 43 percent DTI
limit, 90.6 percent of conventional
purchase loans were safe harbor QM
loans and 95.8 percent were safe harbor
QM or rebuttable presumption QM
loans. If, instead, the Temporary GSE
QM loan definition were not in place
along with the General QM loan
definition (with the 43 percent DTI
limit), and assuming no change in
consumer or creditor behavior from the
2018 HMDA data, then only 69.3
percent of loans would have been safe
harbor QM loans and 73.6 percent of
loans would have been safe harbor QM
loans or rebuttable presumption QM
loans. Raising the DTI limit above 43
percent would increase the size of the
QM market and, as a result, potentially
41743
increase access to credit relative to the
General QM loan definition with a DTI
limit of 43 percent. The magnitude of
the increase in the size of the QM
market and potential increase in access
to credit depends on the selected DTI
limit. A DTI limit in the range of 45 to
48 percent would likely result in a QM
market that is larger than one with a DTI
limit of 43 percent but smaller than the
status quo (i.e., Temporary GSE QM
loan definition and DTI limit of 43
percent). However, the Bureau expects
that consumers and creditors would
respond to changes in the General QM
loan definition, potentially allowing
additional loans to be made as safe
harbor QM loans or rebuttable
presumption QM loans.
TABLE 8—SHARE OF 2018 CONVENTIONAL PURCHASE LOANS WITHIN VARIOUS SAFE HARBOR QM AND REBUTTABLE
PRESUMPTION QM DEFINITIONS
[HMDA data]
Safe harbor QM
(share of
conventional
market)
Approach
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Temporary GSE QM + DTI 43 ....................................................................................................................
Proposal (Pricing at 2.0) ..............................................................................................................................
DTI limit 43 ..................................................................................................................................................
DTI limit 45 ..................................................................................................................................................
DTI limit 46 ..................................................................................................................................................
DTI limit 47 ..................................................................................................................................................
DTI limit 48 ..................................................................................................................................................
DTI limit 49 ..................................................................................................................................................
DTI limit 50 ..................................................................................................................................................
The Bureau seeks comment on
whether to retain a specific DTI limit for
the General QM loan definition, rather
than or in addition to the proposed
price-based approach. The Bureau
specifically seeks comment on a specific
DTI limit between 45 and 48 percent.
The Bureau seeks comment and data on
whether increasing the DTI limit to a
specific percentage between 45 and 48
percent would be a superior alternative
to the proposed price-based approach,
and, if so, on what specific DTI
percentage the Bureau should include in
the General QM loan definition. The
Bureau seeks comment and data as to
how specific DTI percentages would be
expected to affect access to credit and
would be expected to affect the risk that
the General QM loan definition would
include loans for which the Bureau
should not presume that the consumers
who receive them have the ability to
repay. The Bureau also requests
comment on whether increasing the DTI
limit to a specific percentage between
45 to 48 percent would better balance
the goals of ensuring access to
responsible, affordable credit and
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ensuring that QMs are limited to loans
for which the Bureau should presume
that consumers have the ability to repay.
The Bureau also requests comment on
the macroeconomic effects of a DTIbased approach as well as whether and
how the Bureau should weigh such
effects in amending the General QM
loan definition. In addition, the Bureau
requests comment on whether, if the
Bureau adopts a higher specific DTI
limit as part of the General QM loan
definition, the Bureau should retain the
price-based threshold of 1.5 percentage
points over APOR to separate safe
harbor QM loans from rebuttable
presumption QM loans for first-lien
transactions.
The Bureau also requests comment on
whether to adopt a hybrid approach in
which a combination of a DTI limit and
a price-based threshold would be used
in the General QM loan definition. One
such approach could impose a DTI limit
only for loans above a certain pricing
threshold, to reduce the likelihood that
the presumption of compliance with the
ATR requirement would be provided to
loans for which the consumer lacks
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90.6
91.6
69.3
76.1
78.8
81.4
84.1
87.0
90.8
QM overall
(share of
conventional
market)
95.8
96.1
73.6
80.9
83.8
86.6
89.4
92.4
96.4
ability to repay, while avoiding the
potential burden and complexity of a
DTI limit for many lower-priced loans.
The Bureau estimates that 81 percent of
conventional purchase loans have rate
spreads below 1 percentage point and
no product features restricted under the
General QM loan definition. For
example, the rule could impose a DTI
limit of 50 percent for loans with rate
spreads at or above 1 percentage point.
Using 2018 HMDA data, the Bureau
estimates that 91.5 percent of
conventional purchase loans would be
safe harbor QM loans under this
approach, and 96 percent would be QM
loans. A similar approach might impose
a DTI limit above a certain pricing
threshold and also tailor the
presumption of compliance with the
ATR requirement based on DTI. For
example, the rule could provide that (1)
for loans with rate spreads under 1
percentage point, the loan is a safe
harbor QM regardless of the consumer’s
DTI ratio; (2) for loans with rate spreads
at or above 1 but less than 1.5
percentage points, a loan is a safe harbor
QM if the consumer’s DTI ratio does not
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exceed 50 percent and a rebuttable
presumption QM if the consumer’s DTI
is above 50 percent; and (3) if the rate
spread is at or above 1.5 but less than
2 percentage points, loans would be
rebuttable presumption QM if the
consumer’s DTI ratio does not exceed 50
percent and non-QM if the DTI ratio is
above 50 percent. Using 2018 HMDA
data, the Bureau estimates that 91.5
percent of conventional purchase loans
would be safe harbor QM loans under
this approach, and 96.1 percent would
be QM loans. The Bureau requests
comment on whether a DTI limit of up
to 50 percent would be appropriate
under these hybrid approaches that
incorporate pricing into the General QM
loan definition given that the pricing
threshold would generally limit the
additional risk factors beyond the higher
DTI ratio.
Another hybrid approach would
impose a DTI limit on all General QM
loans but would allow higher DTI ratios
for loans below a set pricing threshold.
For example, the rule could generally
impose a DTI limit of 47 percent but
could permit a loan with a DTI ratio up
to 50 percent to be eligible for QM status
under the General QM loan definition if
the APR is less than 2 percentage points
over APOR. This approach might limit
the likelihood of providing QM status to
loans for which the consumer lacks
ability to repay, but also would permit
some lower-priced loans with higher
DTI ratios to achieve QM status. Using
2018 HDMA data, the Bureau estimates
that 90.8 percent of conventional
purchase loans would be safe harbor
QM loans under this approach, and 96.2
percent would be QM loans. The Bureau
requests comment on whether these
hybrid approaches or a different hybrid
approach would better address concerns
about access to credit and ensuring that
the General QM criteria support a
presumption that consumers have the
ability to repay their loans.
With respect to the Bureau’s concerns
about appendix Q, the Bureau requests
comment on an alternative method of
defining debt and income the Bureau
believes could replace appendix Q in
conjunction with a specific DTI limit.
As noted, the Bureau is concerned that
the appendix Q definitions of debt and
income are rigid and difficult to apply
and do not provide the level of
compliance certainty that the Bureau
anticipated at the time of the January
2013 Final Rule. Further, under the
current rule, some loans that would
otherwise have DTI ratios below 43
percent do not satisfy the General QM
loan definition because their method of
documenting and verifying income or
debt is incompatible with appendix Q.
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In particular, the Bureau requests
comment on whether the approach in
proposed § 1026.43(e)(2)(v) could be
applied with a General QM loan
definition that includes a specific DTI
limit. As discussed in more detail in the
section-by-section discussion of
§ 1026.43(e)(2)(v), proposed
§ 1026.43(e)(2)(v)(A) would require
creditors to consider income or assets,
debt obligations, alimony, child
support, and DTI or residual income for
their ability-to-repay determination.
Proposed § 1026.43(e)(2)(v)(B) and the
associated commentary explain how
creditors must verify and count the
consumer’s current or reasonably
expected income or assets other than the
value of the dwelling (including any
real property attached to the dwelling)
that secures the loan and the consumer’s
current debt obligations, alimony, and
child support, relying on the standards
set forth in the ATR requirements in
§ 1026.43(c). Proposed
§ 1026.43(e)(2)(v)(B) would further
provide creditors a safe harbor with
standards the Bureau may specify for
verifying debt and income. This could
potentially include relevant provisions
from the Fannie Mae Single Family
Selling Guide, the Freddie Mac SingleFamily Seller/Servicer Guide, FHA’s
Single Family Housing Policy
Handbook, the VA’s Lenders Handbook,
and USDA’s Field Office Handbook for
the Direct Single Family Housing
Program and Handbook for the Single
Family Guaranteed Loan Program,
current as of this proposal’s public
release. The Bureau also is seeking
comments on potentially adding to the
safe harbor other standards that external
stakeholders develop.
The Bureau requests comment on
whether the alternative method of
defining debt and income in proposed
§ 1026.43(e)(2)(v)(B) could replace
appendix Q in conjunction with a
specific DTI limit. As noted above, the
Bureau is concerned that this approach
that combines a general standard with
safe harbors may not be appropriate for
a specific DTI limit. The Bureau
requests comment on whether the
approach in proposed
§ 1026.43(e)(2)(v)(B) would address the
problems associated with appendix Q
and would provide an alternative
method of defining debt and income
that would be workable with a specific
DTI limit. The Bureau seeks comment
on whether allowing creditors to use
standards the Bureau may specify to
verify debt and income—as would be
permitted under proposed
§ 1026.43(e)(2)(v)(B)—as well as
potentially other standards external
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stakeholders develop and the Bureau
adopts would provide adequate clarity
and flexibility while also ensuring that
DTI calculations across creditors and
consumers are sufficiently consistent to
provide meaningful comparison of a
consumer’s calculated DTI to any DTI
ratio threshold specified in the rule.
The Bureau also requests comment on
what changes, if any, would be needed
to proposed § 1026.43(e)(2)(v)(B) to
accommodate a specific DTI limit. For
example, the Bureau requests comment
on whether creditors that comply with
guidelines that have been revised but
are substantially similar to the guides
specified above should receive a safe
harbor, as the Bureau has proposed. The
Bureau also seeks comment on its
proposal to allow creditors to ‘‘mix and
match’’ verification standards, including
whether the Bureau should instead limit
or prohibit such ‘‘mixing and matching’’
under an approach that incorporates a
specific DTI limit. The Bureau requests
comment on whether these aspects of
the approach in proposed
§ 1026.43(e)(2)(v)(B), if used in
conjunction with a specific DTI limit,
would provide sufficient certainty to
creditors, investors, and assignees
regarding a loan’s QM status and
whether it would result in potentially
inconsistent application of the rule.
VI. Section-by-Section Analysis
1026.43 Minimum Standards for
Transactions Secured by a Dwelling
43(b) Definitions
43(b)(4)
Section 1026.43(b)(4) provides the
definition of a higher-priced covered
transaction. It provides that a covered
transaction is a higher-priced covered
transaction if the APR exceeds APOR for
a comparable transaction as of the date
the interest rate is set by the applicable
rate spread specified in the Rule. For
purposes of General QM loans under
§ 1026.43(e)(2), the applicable rate
spreads are 1.5 or more percentage
points for a first-lien covered
transaction and 3.5 or more percentage
points for a subordinate-lien covered
transaction. Pursuant to § 1026.43(e)(1),
a loan that satisfies the requirements of
a qualified mortgage and is a higherpriced covered transaction under
§ 1026.43(b)(4) is eligible for a
rebuttable presumption of compliance
with the ATR requirements. A qualified
mortgage that is not a higher-priced
covered transaction is eligible for a
conclusive presumption of compliance
with the ATR requirements.
The Bureau is proposing to revise
§ 1026.43(b)(4) to create a special rule
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for purposes of determining whether
certain types of General QM loans under
§ 1026.43(e)(2) are higher-priced
covered transactions. This special rule
would apply to loans for which the
interest rate may or will change within
the first five years after the date on
which the first regular periodic payment
will be due. For such loans, the creditor
would be required to determine the
APR, for purposes of determining
whether a QM under § 1026.43(e)(2) is
a higher-priced covered transaction, by
treating the maximum interest rate that
may apply during that five-year period
as the interest rate for the full term of
the loan.
An identical special rule also would
apply to loans for which the interest rate
may or will change under proposed
§ 1026.43(e)(2)(vi), which would revise
the definition of a General QM loan
under § 1026.43(e)(2) to implement the
price-based approach described in part
V. The section-by-section analysis of
proposed § 1026.43(e)(2)(vi) explains
the Bureau’s reasoning for proposing
these rules. The special rules in the
proposed revisions to § 1026.43(b)(4)
and in proposed § 1026.43(e)(2)(vi)
would not modify other provisions in
Regulation Z for determining the APR
for other purposes, such as the
disclosures addressed in or subject to
the commentary to § 1026.17(c)(1).
Proposed comment 43(b)(4)–4
explains that provisions in subpart C,
including commentary to
§ 1026.17(c)(1), address how to
determine the APR disclosures for
closed-end credit transactions and that
provisions in § 1026.32(a)(3) address
how to determine the APR to determine
coverage under § 1026.32(a)(1)(i). It
further explains that proposed
§ 1026.43(b)(4) requires, only for
purposes of a QM under paragraph
(e)(2), a different determination of the
APR for purposes of paragraph (b)(4) for
a loan for which the interest rate may
or will change within the first five years
after the date on which the first regular
periodic payment will be due. It also
cross-references proposed comment
43(e)(2)(vi)–4 for how to determine the
APR of such a loan for purposes of
§ 1026.43(b)(4) and (e)(2)(vi).
As discussed above in part IV, TILA
section 105(a), directs the Bureau to
prescribe regulations to carry out the
purposes of TILA, and provides that
such regulations may contain additional
requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions that the Bureau judges are
necessary or proper to effectuate the
purposes of TILA, to prevent
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circumvention or evasion thereof, or to
facilitate compliance therewith. In
particular, it is the purpose of TILA
section 129C, as amended by the DoddFrank Act, to assure that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans and that
are understandable.
As also discussed above in part IV,
TILA section 129C(b)(3)(B)(i) authorizes
the Bureau to prescribe regulations that
revise, add to, or subtract from the
criteria that define a QM upon a finding
that such regulations are necessary or
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of section
129C, necessary and appropriate to
effectuate the purposes of section 129C
and section 129B, to prevent
circumvention or evasion thereof, or to
facilitate compliance with such section.
The Bureau is proposing the special
rule in § 1026.43(b)(4) regarding the
APR determination of certain loans for
which the interest rate may or will
change pursuant to its authority under
TILA section 105(a) to make such
adjustments and exceptions as are
necessary and proper to effectuate the
purposes of TILA, including that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans. The Bureau believes that
these proposed provisions may ensure
that safe harbor QM status would not be
accorded to certain loans for which the
interest rate may or will change that
pose a heightened risk of becoming
unaffordable relatively soon after
consummation. The Bureau is also
proposing these provisions pursuant to
its authority under TILA section
129C(b)(3)(B)(i) to revise and add to the
statutory language. The Bureau believes
that the proposed APR determination
provisions in § 1026.43(b)(4) may ensure
that responsible, affordable mortgage
credit remains available to consumers in
a manner consistent with the purpose of
TILA section 129C, referenced above, as
well as effectuate that purpose.
The Bureau requests comment on all
aspects of the proposed special rule that
would be required in proposed
§ 1026.43(b)(4) to determine the APR for
certain loans for which the interest rate
may or will change. See the section-bysection analysis of proposed
§ 1026.43(e)(2)(vi) for specific data
requests and additional solicitation of
comments.
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43(c) Repayment Ability
43(c)(4) Verification of Income or
Assets
TILA section 129C(a)(4) states that a
creditor making a residential mortgage
loan shall verify amounts of income or
assets that such creditor relies on to
determine repayment ability, including
expected income or assets, by reviewing
the consumer’s Internal Revenue
Service (IRS) Form W–2, tax returns,
payroll receipts, financial institution
records, or other third-party documents
that provide reasonably reliable
evidence of the consumer’s income or
assets. In the January 2013 Final Rule,
the Bureau implemented this
requirement in § 1026.43(c)(4), which
states that a creditor must verify the
amounts of income or assets that the
creditor relies on under
§ 1026.43(c)(2)(i) to determine a
consumer’s ability to repay a covered
transaction using third-party records
that provide reasonably reliable
evidence of the consumer’s income or
assets. Section 1026.43(c)(4) further
states that a creditor may verify the
consumer’s income using a tax-return
transcript issued by the IRS and lists
several examples of other records the
creditor may use to verify the
consumer’s income or assets, including,
among others, financial institution
records. Additionally,
§ 1026.43(e)(2)(v)(A) provides that a
General QM loan is a covered
transaction for which the creditor
considers and verifies at or before
consummation the consumer’s current
or reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan in
accordance with § 1026.43(c)(4), as well
as § 1026.43(c)(2)(i) and appendix Q.
The Bureau is not proposing to
change the text of § 1026.43(c)(4). The
Bureau is proposing to add comment
43(c)(4)–4, which would clarify that a
creditor does not meet the requirements
of § 1026.43(c)(4) if it observes an inflow
of funds into the consumer’s account
without confirming that the funds are
income. The proposed comment would
also state that, for example, a creditor
would not meet the requirements of
§ 1026.43(c)(4) where it observes an
unidentified $5,000 deposit in the
consumer’s account but fails to take any
measures to confirm or lacks any basis
to conclude that the deposit represents
the consumer’s personal income and
not, for example, proceeds from the
disbursement of a loan. (As described
below in the section-by-section analysis
of proposed § 1026.43(e)(2)(v), below,
the Bureau is also proposing to amend
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the verification requirements in the
General QM loan definition.)
The Bureau is proposing to include
this clarification as part of its effort to
avoid potential compliance uncertainty
that could arise from the removal of
appendix Q and from the resulting
greater reliance on regulation text and
commentary to define a creditor’s
obligations to consider and verify a
consumer’s income, assets, debt
obligations, alimony, and child support.
(Other proposed revisions related to this
effort are described below with respect
to § 1026.43(e)(2)(v).) The Bureau
understands, based on outreach and on
its experience supervising creditors, that
this clarification could be useful to
creditors because the Rule includes
‘‘financial institution records’’ as one of
the examples of records that a creditor
may use to verify a consumer’s income
or assets. As part of their underwriting
process, creditors may seek to use
transactions in electronic or paper
financial records such as consumer
account statements to examine inflows
and outflows from consumers’ accounts.
In many cases, there may be sufficient
basis in transaction data alone, or in
combination with other information, to
determine that a deposit or other credit
to a consumer’s account represents
income, such that a creditor’s use of the
data in an underwriting process is
distinguishable from the example in the
proposed comment. The Bureau’s
preliminary view is that this
clarification would help creditors
understand their verification
requirements under the General QM
loan definition, given that proposed
comment 43(e)(2)(v)(B)–1 would explain
that a creditor must verify the
consumer’s current or reasonably
expected income or assets in accordance
with § 1026.43(c)(4) and its
commentary.241
The Bureau requests comment on this
proposed new comment. The Bureau
also requests comment on whether
additional clarifications may be helpful
with respect to cash flow underwriting
and verifying whether inflows are
income under the Rule.
43(e) Qualified Mortgages
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43(e)(2) Qualified Mortgage Defined—
General
43(e)(2)(v)
As discussed above in part V, the
Bureau is proposing to remove the
specific DTI limit in § 1026.43(e)(2)(vi).
Furthermore, as discussed below in this
section-by-section analysis of proposed
241 See the section-by-section analysis for
proposed § 1026.43(e)(2)(v)(B).
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§ 1026.43(e)(2)(v), the Bureau is
proposing to require that creditors
consider the consumer’s DTI ratio or
residual income and to remove the
appendix Q requirements from
§ 1026.43(e)(2)(v). The Bureau
tentatively concludes that these
proposed amendments necessitate
additional revisions to clarify a
creditor’s obligation to consider and
verify certain information under the
General QM loan definition.
Consequently, the Bureau is proposing
to amend the consider and verify
requirements in § 1026.43(e)(2)(v) and
its associated commentary.
TILA section 129C contains several
requirements that creditors consider and
verify various types of information. In
the statute’s general ATR provisions,
TILA section 129C(a)(1) requires that a
creditor make a reasonable and good
faith determination, based on ‘‘verified
and documented information,’’ that a
consumer has a reasonable ability to
repay the loan. TILA section 129C(a)(3)
states that a creditor’s ATR
determination shall include
‘‘consideration’’ of the consumer’s
credit history, current income, expected
income the consumer is reasonably
assured of receiving, current obligations,
DTI ratio or the residual income the
consumer will have after paying nonmortgage debt and mortgage-related
obligations, employment status, and
other financial resources other than the
consumer’s equity in the dwelling or
real property that secures repayment of
the loan. TILA section 129C(a)(4) states
that a creditor making a residential
mortgage loan shall verify amounts of
income or assets that such creditor
relies on to determine repayment
ability, including expected income or
assets, by reviewing the consumer’s IRS
Form W–2, tax returns, payroll receipts,
financial institution records, or other
third-party documents that provide
reasonably reliable evidence of the
consumer’s income or assets. Finally, in
the statutory QM definition, TILA
section 129C(b)(2)(A)(iii) provides that,
for a loan to be a QM, the income and
financial resources relied on to qualify
the obligors on the loan must be
‘‘verified and documented.’’
In the January 2013 Final Rule, the
Bureau implemented the requirements
to consider and verify various factors for
the general ATR standard in
§ 1026.43(c)(2), (c)(3), (c)(4), and (c)(7).
Section 1026.43(c)(2) states that—except
as provided in certain other provisions
(including the General QM loan
definition)—a creditor must consider
several specified factors in making its
ATR determination. These factors
include, among others, the consumer’s
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current or reasonably expected income
or assets, other than the value of the
dwelling, including any real property
attached to the dwelling, that secures
the loan (under § 1026.43(c)(2)(i)); the
consumer’s current debt obligations,
alimony, and child support
(§ 1026.43(c)(2)(vi)); and the consumer’s
monthly DTI ratio or residual income in
accordance with § 1026.43(c)(7). Section
1026.43(c)(3) requires a creditor to
verify the information the creditor relies
on in determining a consumer’s
repayment ability using reasonably
reliable third-party records, with a few
specified exceptions. Section
1026.43(c)(3) further states that a
creditor must verify a consumer’s
income and assets that the creditor
relies on in accordance with
§ 1026.43(c)(4). Section 1026.43(c)(4)
requires that a creditor verify the
amounts of income or assets that the
creditor relies on to determine a
consumer’s ability to repay a covered
transaction using third-party records
that provide reasonably reliable
evidence of the consumer’s income or
assets. It also provides examples of
records the creditor may use to verify
the consumer’s income or assets.
As noted in part V, the January 2013
Final Rule incorporated some aspects of
the general ATR standards into the
General QM loan definition, including
the requirement to consider and verify
income or assets and debt obligations,
alimony, and child support. Section
1026.43(e)(2)(v) states that a General
QM loan is a covered transaction for
which the creditor considers and
verifies at or before consummation: (A)
The consumer’s current or reasonably
expected income or assets other than the
value of the dwelling (including any
real property attached to the dwelling)
that secures the loan, in accordance
with appendix Q, § 1026.43(c)(2)(i), and
(c)(4); and (B) the consumer’s current
debt obligations, alimony, and child
support in accordance with appendix Q,
§ 1026.43(c)(2)(vi) and (c)(3). The
Bureau used its adjustment and
exception authority under TILA section
129C(b)(3)(B)(i) to require creditors to
consider and verify the consumer’s debt
obligations, alimony, and child support
pursuant to the General QM loan
definition.
The Bureau proposes to revise
§ 1026.43(e)(2)(v) to separate and clarify
the requirements to consider and verify
certain information. Proposed
§ 1026.43(e)(2)(v)(A) would contain the
‘‘consider’’ requirements, and proposed
§ 1026.43(e)(2)(v)(B) would contain the
‘‘verify’’ requirements. Specifically,
proposed § 1026.43(e)(2)(v) would state
that a General QM loan is a covered
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transaction for which the creditor: (A)
Considers the consumer’s income or
assets, debt obligations, alimony, child
support, and monthly DTI ratio or
residual income, using the amounts
determined from § 1026.43(e)(2)(v)(B);
and (B) verifies the consumer’s current
or reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan using
third-party records that provide
reasonably reliable evidence of the
consumer’s income or assets, in
accordance with § 1026.43(c)(4), and the
consumer’s current debt obligations,
alimony, and child support using
reasonably reliable third-party records
in accordance with § 1026.43(c)(3). The
regulatory text would also state that, for
purposes of § 1026.43(e)(2)(v)(A), the
consumer’s monthly DTI ratio or
residual income is determined in
accordance with § 1026.43(c)(7), except
that the consumer’s monthly payment
on the covered transaction, including
the monthly payment for mortgagerelated obligations, is calculated in
accordance with § 1026.43(e)(2)(iv).
As noted above, the Bureau is
proposing to remove the specific 43
percent DTI limit in § 1026.43(e)(2)(vi)
and the appendix Q requirement in
§ 1026.43(e)(2)(v). Given that these
proposed amendments would change
how a creditor would satisfy the General
QM loan definition, the Bureau is
proposing to amend the consider and
verify requirements in
§ 1026.43(e)(2)(v). Under the Bureau’s
proposal, the General QM loan
definition would no longer include a
specific DTI limit in § 1026.43(e)(2)(vi),
but a creditor would be required to
consider DTI or residual income, debt
obligations, alimony, child support, and
income or assets under
§ 1026.43(e)(2)(v). The Bureau
tentatively concludes that providing
additional explanation of the proposed
requirement to consider this
information may ease compliance
uncertainty. To meet the consider
requirement in § 1026.43(e)(2)(v)(A), the
proposal would require the creditor to
use the amounts determined according
to § 1026.43(e)(2)(v)(B). For example, if
the creditor relied on assets in its
ability-to-repay determination, the
creditor could consider current and
reasonably expected assets other than
the value of the dwelling (including any
real property attached to the dwelling)
that secures the loan as calculated under
1026.43(e)(2)(v)(B). The Bureau
tentatively concludes that providing
additional explanation of the proposed
requirement to consider income or
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assets, debt obligations, alimony, child
support, and DTI or residual income
may ease compliance uncertainty.
The Bureau is proposing to remove
appendix Q and the requirement to use
appendix Q from the rule. The Bureau’s
principal reason for adopting appendix
Q in 2013 was to provide clear and
specific standards for calculating a
consumer’s debt, income, and DTI ratio
for purposes of comparison with the 43
percent DTI limit and to provide
certainty about whether a loan meets the
requirements for being a General QM
loan. As discussed in more detail below,
appendix Q has not provided clear and
specific standards, and the Bureau is
proposing to remove the 43 percent DTI
limit. Accordingly, the Bureau
preliminarily concludes that appendix
Q, and the requirement to use appendix
Q to calculate DTI for purposes of the
General QM loan definition, should be
removed from the Rule. However,
appendix Q currently serves the
additional function of specifying what a
creditor must do to comply with the
requirements of § 1026.43(e)(2)(v) to
consider and verify a consumer’s
income, assets, debt obligations,
alimony, and child support. The Bureau
is concerned that the rule would create
significant compliance uncertainty if it
merely removed appendix Q without
clarifying how a creditor can evaluate
various types of income, assets, and
debt.
The Bureau’s objective in proposing
to clarify the § 1026.43(e)(2)(v)
requirements to consider a consumer’s
income, assets, debt obligations,
alimony, and child support is to ensure
that a loan for which a creditor
disregards these factors cannot obtain
QM status, while ensuring that creditors
and investors can readily determine if a
loan is a QM. The Bureau’s primary
objective in clarifying the requirement
to verify a consumer’s income, assets,
debt obligations, alimony, and child
support is to provide reasonable
assurance that only income and assets
that exist or will exist are part of a
creditor’s ATR determination and that
none of the consumer’s debt obligations,
alimony, and child support are
excluded from consideration. The
Bureau also aims to ensure that the
verification requirement provides
substantial flexibility for creditors to
adopt innovative verification methods,
such as the use of bank account data
that identifies the source of deposits to
determine personal income, while also
specifying examples of compliant
verification standards to provide greater
certainty that a loan has QM status.
As described above, proposed
§ 1026.43(e)(2)(v)(B) would provide that
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41747
creditors must verify income, assets,
debt obligations, alimony, and child
support in accordance with the general
ATR verification provisions.
Specifically, § 1026.43(e)(2)(v)(B)(1)
requires a creditor to verify the
consumer’s current or reasonably
expected income or assets (including
any real property attached to the value
of the dwelling) that secures the loan in
accordance with § 1026.43(c)(4), which
states that a creditor must verify such
amounts using third-party records that
provide reasonably reliable evidence of
the consumer’s income or assets.
Section 1026.43(e)(2)(v)(B)(2) requires a
creditor to verify the consumer’s current
debt obligations, alimony, and child
support in accordance with
§ 1026.43(c)(3), which states that a
creditor must verify such amounts using
reasonably reliable third-party records.
So long as a creditor complies with the
provisions of § 1026.43(c)(3) with
respect to debt obligations, alimony, and
child support and § 1026.43(c)(4) with
respect to income and assets, the
creditor is permitted to use any
reasonable verification methods and
criteria. By incorporating § 1026.43(c)(3)
and (c)(4) in § 1026.43(e)(2)(v)(B), the
Bureau seeks to maintain in the General
QM loan verification requirements the
flexibility inherent to these ATR
provisions. At the same time, the
Bureau seeks to provide greater
certainty to creditors regarding the
General QM loan verification
requirements by explaining that a
creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
any one of certain verification standards
the Bureau would specify.
The Bureau also proposes revisions to
the commentary for § 1026.43(e)(2)(v).
The Bureau proposes to remove
comments 43(e)(2)(v)–2 and –3. In
general, these comments currently
clarify that creditors must consider and
verify any income as well as any debt
or liability specified in appendix Q and
that, while other income and debt may
be considered and verified, such income
and debt would not be included in the
DTI ratio determination required by
§ 1026.43(e)(2)(vi). The Bureau
preliminarily concludes that these
comments would no longer be needed
in light of the proposed revisions to
§ 1026.43(e)(2)(v). The first sentence of
each of these two comments merely
restates language in the regulatory text.
The second sentence would no longer
be needed because the Bureau is
proposing to remove references to
appendix Q in § 1026.43(e)(2)(v). And
the third sentence would no longer be
needed because the Bureau is proposing
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to remove the DTI limit in
§ 1026.43(e)(2)(vi).
43(e)(2)(v)(A)
As explained above, the Bureau
proposes to revise § 1026.43(e)(2)(v),
which currently includes the
requirement to consider and verify the
consumer’s reasonably expected income
or assets, debt obligations, alimony, and
child support, as part of the QM
definition. The Bureau is proposing to
separate the consider and verify
requirements in § 1026.43(e)(2)(v) into
§ 1026.43(e)(2)(v)(A) for the ‘‘consider’’
requirements and § 1026.43(e)(2)(v)(B)
for the ‘‘verify’’ requirements. The
Bureau proposes to revise
§ 1026.43(e)(2)(v)(A) to provide that a
General QM loan is a covered
transaction for which the creditor, at or
before consummation, considers the
consumer’s income or assets, debt
obligations, alimony, child support, and
monthly DTI ratio or residual income,
using the amounts determined from
proposed § 1026.43(e)(2)(v)(B).
For purposes of § 1026.43(e)(2)(v)(A),
the Bureau proposes to prescribe the
same method for the creditor to
calculate the consumer’s monthly
payment that is currently prescribed in
§ 1026.43(e)(2)(vi), in which the
consumer’s monthly DTI ratio is
determined using the consumer’s
monthly payment on the covered
transaction and any simultaneous loan
that the creditor knows or has reason to
know will be made. The Bureau is
proposing to eliminate appendix Q and
the DTI limit in § 1026.43(e)(2)(vi). To
make clear that any DTI calculation
must incorporate alimony and child
support—which is currently facilitated
through appendix Q—the Bureau is
proposing to cross-reference the
§ 1026.43(c)(7) requirements. In order to
maintain the monthly DTI ratio
calculation method from
§ 1026.43(e)(2)(vi)(B), the Bureau is
proposing to move the text prescribing
the calculation method from
§ 1026.43(e)(2)(vi)(B) to
§ 1026.43(e)(2)(v)(A). The Bureau is
proposing to expand the § 1026.43(c)(7)
cross-reference and the monthly
payment calculation method to residual
income given that the proposal allows
creditors the option of considering
residual income in lieu of DTI. The
Bureau tentatively concludes that the
reference to simultaneous loans is not
necessary because the cross-reference to
§ 1026.43(c)(7) would require creditors
to consider simultaneous loans.
Proposed § 1026.43(e)(2)(v)(A) would
revise existing § 1026.43(e)(2)(v) by
requiring a creditor to consider DTI or
residual income in addition to income
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or assets, debt obligations, alimony, and
child support, as determined under
proposed § 1026.43(e)(2)(v)(B). The
Bureau tentatively concludes that the
amounts considered under
§ 1026.43(e)(2)(v)(A) should be
consistent with the amounts verified
according to § 1026.43(e)(2)(v)(B). For
example, if the creditor relies on assets
in its ability-to-repay determination and
seeks to comply with the consider
requirement under § 1026.43(e)(2)(v)(A),
the creditor could consider current and
reasonably expected assets other than
the value of the dwelling (including any
real property attached to the dwelling)
that secures the loan as calculated under
1026.43(e)(2)(v)(B).
The Bureau is proposing the revision
to add DTI to ensure that, although the
Bureau is proposing to eliminate the
DTI limit in § 1026.43(e)(2)(vi), creditors
still must consider DTI (or residual
income, as discussed below) as part of
the General QM loan definition. The
Bureau continues to believe that DTI is
an important factor in assessing a
consumer’s ability to repay. Comments
responding to the 2019 ANPR indicate
that creditors generally use DTI as part
of their underwriting process. These
comments indicate that requiring as part
of the General QM loan definition that
creditors consider DTI when
determining a consumer’s ability to
repay—even if the QM definition no
longer includes a specific DTI limit—
would be consistent with current market
practices. In a final rule issued in June
2013 (June 2013 Final Rule), the Bureau
created an exception from the DTI limit
requirement for small creditors that
hold QMs on portfolio.242 The Bureau
determined that, even though the DTI
limit was not appropriate for a small
creditor that holds loans on their
portfolio, DTI (or residual income) was
still a fundamental part of the creditor’s
ATR determination.243 The Bureau
tentatively concludes that requiring
creditors to consider DTI as part of the
QM definition is necessary and
appropriate to ensure that consumers
are offered and receive residential
FR 35430 (June 12, 2013).
at 35487 (‘‘The Bureau continues to believe
that consideration of debt-to-income ratio or
residual income is fundamental to any
determination of ability to repay. A consumer is
able to repay a loan if he or she has sufficient funds
to pay his or her other obligations and expenses and
still make the payments required by the terms of the
loan. Arithmetically comparing the funds to which
a consumer has recourse with the amount of those
funds the consumer has already committed to
spend or is committing to spend in the future is
necessary to determine whether sufficient funds
exist.’’).
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243 Id.
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mortgage loans on terms that reasonably
reflect their ability to repay the loan.
Proposed § 1026.43(e)(2)(v)(A) would
require creditors to consider either a
consumer’s monthly residual income or
DTI. The January 2013 Final Rule
adopted a bright-line DTI limit for the
General QM loan definition under
§ 1026.43(e)(2)(vi), but the Bureau
concluded that it did not have enough
information to establish a bright-line
residual income limit as an alternative
to the DTI limit.244 In comparison, TILA
and the January 2013 Final Rule allow
creditors to consider either residual
income or DTI as part of the general
ATR requirements in
§ 1026.43(c)(2)(vii), and the June 2013
Final Rule allows small creditors
originating QM loans pursuant to
§ 1026.43(e)(5) to consider DTI or
residual income. Given the Bureau’s
proposal to eliminate the bright-line DTI
limit in § 1026.43(e)(2)(vi), comments
from stakeholders discussed in the
January 2013 Final Rule regarding the
value of residual income in determining
ability to repay,245 and the Bureau’s
determination in the June 2013 Final
Rule that residual income can be a
valuable measure of ability to repay, the
Bureau tentatively concludes that
allowing creditors the option to
consider (but not requiring them to
consider) residual income in lieu of DTI
would allow space for creditor
flexibility and innovation and is
necessary and proper to preserve access
to responsible, affordable mortgage
credit.
The Bureau is proposing the
requirement that the creditor consider
the consumer’s debt obligations,
alimony, child support, income or
assets, and monthly DTI or residual
income under § 1026.43(e)(2)(A)
pursuant to its adjustment and
244 78 FR 6408, 6528 (Jan. 30, 2013)
(‘‘Unfortunately, however, the Bureau lacks
sufficient data, among other considerations, to
mandate a bright-line rule based on residual income
at this time.’’).
245 Id. at 6527 (‘‘Another consumer group
commenter argued that residual income should be
incorporated into the definition of QM. Several
commenters suggested that the Bureau use the
general residual income standards of the VA as a
model for a residual income test, and one of these
commenters recommended that the Bureau
coordinate with FHFA to evaluate the experiences
of the GSEs in using residual income in
determining a consumer’s ability to repay.’’); id. at
6528 (‘‘Finally, the Bureau acknowledges arguments
that residual income may be a better measure of
repayment ability in the long run. A consumer with
a relatively low household income may not be able
to afford a 43 percent debt-to-income ratio because
the remaining income, in absolute dollar terms, is
too small to enable the consumer to cover his or her
living expenses. Conversely, a consumer with a
relatively high household income may be able to
afford a higher debt ratio and still live comfortably
on what is left over.’’).
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exception authority under TILA section
129C(b)(3)(B)(i). The Bureau
preliminarily finds that this addition to
the General QM loan criteria is
necessary and proper to ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner that is consistent with the
purposes of TILA section 129C and
necessary and appropriate to effectuate
the purposes of TILA section 129C,
which includes assuring that consumers
are offered and receive residential
mortgage loans on terms that reasonably
reflect their ability to repay the loan.
The Bureau also incorporates this
requirement pursuant to its authority
under TILA section 105(a) to issue
regulations that, among other things,
contain such additional requirements,
other provisions, or that provide for
such adjustments for all or any class of
transactions, that in the Bureau’s
judgment are necessary or proper to
effectuate the purposes of TILA, which
include the above purpose of section
129C. The Bureau preliminarily finds
that including consideration of DTI or
residual income in the General QM loan
criteria is necessary and proper to fulfill
the purpose of assuring that consumers
are offered and receive residential
mortgage loans on terms that reasonably
reflect their ability to repay the loan.
The Bureau also believes that
§ 1026.43(e)(2)(A) is authorized by TILA
section 129C(b)(2)(A)(vi), which
permits, but does not require, the
Bureau to adopt guidelines or
regulations relating to debt-to-income
ratios or alternative measures of ability
to pay regular expenses after payment of
total monthly debt.
The Bureau is proposing to revise
§ 1026.43(e)(2)(v)(A) to incorporate the
monthly payment calculation method
from current § 1026.43(e)(2)(vi)(B). In
order to preserve the incorporation of
alimony and child support in this
calculation—which currently is
facilitated by appendix Q—the Bureau
is proposing to cross-reference the
requirement in § 1026.43(c)(7). The
cross-reference also incorporates
simultaneous loans. Additionally, given
the proposal to allow creditors to
consider residual income in lieu of
monthly DTI, the Bureau is proposing to
apply this calculation requirement to
residual income. This proposed revision
would ensure that the mortgage
payment and the payment on any
simultaneous loans are included in a
manner consistent with
§ 1026.43(e)(2)(iv) both when a creditor
considers DTI or residual income. The
Bureau tentatively concludes that
requiring this pre-existing calculation
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method for DTI and residual income is
appropriate because it would assist
creditors in complying with the
consider requirement and would assist
in enforcement of the rule because it
would encourage consistency in DTI
and residual income calculations.
To clarify the proposed requirements
in § 1026.43(e)(2)(v)(A), the Bureau
proposes to add comments
43(e)(2)(v)(A)–1 to –3. The Bureau
proposes these new comments because
they may be appropriate to ensure that
the rule’s requirement to consider the
consumer’s debt obligations, alimony,
child support, income or assets, and DTI
ratio or residual income is clear and
detailed enough to provide creditors
with sufficient certainty about whether
a loan satisfies the General QM loan
definition. Under the proposal, the
General QM loan definition would no
longer include a specific DTI limit in
§ 1026.43(e)(2)(vi) and would require
instead that creditors consider DTI or
residual income, along with debt and
income. By requiring calculation of DTI
and comparing that calculation to a DTI
limit, the existing DTI limit provides
creditors with a bright-line rule
demonstrating how to consider the
consumer’s income or assets, debt, and
DTI when making its ATR
determination. Without providing
additional explanation of the proposed
requirement to consider DTI or residual
income, along with debt and income,
eliminating the DTI limit could create
compliance uncertainty that could leave
some creditors reluctant to originate QM
loans to consumers and could allow
other creditors to originate risky loans
without considering DTI or residual
income and still receive QM status. In
addition, without additional
explanation, it may be difficult to
enforce the requirement to consider
income or assets, debt obligations,
alimony, child support, and monthly
DTI or residual income. Several ANPR
commenters requested that the Bureau
maintain the ‘‘consider’’ requirement in
the General QM loan definition and
clarify this requirement. Accordingly,
the Bureau tentatively concludes that it
is appropriate to provide additional
explanation for the consider
requirement in § 1026.43(e)(2)(v) in
proposed comments 43(e)(2)(v)(A)–1 to
–3.
Proposed comment 43(e)(2)(v)(A)–1
would explain that, in order to comply
with the requirement in
§ 1026.43(e)(2)(v)(A) to consider income
or assets, debt obligations, alimony,
child support, and DTI ratio or residual
income, a creditor must take into
account income or assets, debt
obligations, alimony, child support, and
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monthly DTI ratio or residual income in
its ATR determination. In making this
determination, creditors must use the
amounts determined under the
requirement to verify the consumer’s
current or reasonably expected income
or assets and the consumer’s current
debt obligations, alimony, and child
support in § 1026.43(e)(2)(v)(B). The
proposed comment would further
explain that, according to requirements
in § 1026.25(a) to retain records showing
compliance with the Rule, a creditor
must retain documentation showing
how it took into account these factors in
its ATR determination. By citing the
record retention requirement, this
comment would clarify that to comply
with § 1026.43(e)(2)(v)(A) and obtain
QM status, a creditor must document
how the required factors were taken into
account in the creditor’s ATR
determination. If a creditor ignores the
required factors of income or assets,
debt obligations, alimony, child
support, and DTI or residual income—
or otherwise did not take them into
account as part of its ATR
determination—the loan would not be
eligible for QM status. While creditors
must take these factors into account and
retain documentation of how they did
so, the Bureau emphasizes that creditors
would have great latitude in how they
took these factors into account and that
they would be able to document how
they did so in a simple and nonburdensome manner, such as a creditor
documenting that it followed its
standard procedures for considering
these factors in connection with a
specific loan. As an example of the type
of documents that a creditor might use
to show that income or assets, debt
obligations, alimony, child support, and
DTI or residual income were taken into
account, the proposed comment cites an
underwriter worksheet or a final
automated underwriting system
certification, alone or in combination
with the creditor’s applicable
underwriting standards, that shows how
these required factors were taken into
account in the creditor’s ability-to-repay
determination.
To reinforce that the QM definition no
longer would include a specific DTI
limit, proposed comment 43(e)(2)(v)(A)–
2 explains that creditors have flexibility
in how they consider these factors and
that the proposed rule does not
prescribe a specific monthly DTI or
residual income threshold. To assist
creditors, the Bureau is proposing two
examples of how to comply with the
requirement to consider DTI. Proposed
comment 43(e)(2)(v)(A)–2 provides an
example in which a creditor considers
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monthly DTI or residual income by
establishing monthly DTI or residual
income thresholds for its own
underwriting standards and
documenting how those thresholds were
applied to determine the consumer’s
ability to repay. Given that some
creditors use several thresholds that
depend on any relevant compensating
factors, the Bureau is also proposing a
second example. The second example in
the comment would provide that a
creditor may also consider DTI or
residual income by establishing
monthly DTI or residual income
thresholds and exceptions to those
thresholds based on other compensating
factors, and documenting application of
the thresholds along with any
applicable exceptions. The Bureau
tentatively concludes that both
examples are consistent with current
market practices and therefore
providing these examples would clarify
a loan’s QM status without imposing a
significant burden on the market.
The Bureau is aware that some
creditors look to factors in addition to
income or assets, debt obligations,
alimony, child support, and DTI or
residual income in determining a
consumer’s ability to repay. For
example, the Bureau is aware that some
creditors may look to net cash flow into
a consumer’s deposit account as a
method of residual income analysis. As
the Bureau understands it, a net cash
flow calculation typically consists of
residual income, further reduced by
consumer expenditures other than those
already subtracted from income in
calculating the consumer’s residual
income. Accordingly, the result of a net
cash flow calculation may be useful in
to assessing the adequacy of a particular
consumer’s residual income.
Proposed comment 43(e)(2)(v)(A)–3
would explain that the requirement in
§ 1026.43(e)(2)(v)(A) to consider income
or assets, debt obligations, alimony,
child support, and monthly DTI or
residual income does not preclude the
creditor from taking into account
additional factors that are relevant in
making its ability-to-repay
determination. The proposed comment
further provides that creditors may look
to comment 43(c)(7)–3 for guidance on
considering additional factors in
determining the consumer’s ATR.
Comment 43(c)(7)–3 explains that
creditors may consider additional
factors when determining a consumer’s
ability to repay and provides an
example of looking to consumer assets
other than the value of the dwelling,
such as a savings account.
The Bureau seeks comment on
proposed § 1026.43(e)(2)(v)(A) and the
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related commentary. The Bureau
specifically seeks comment on whether
the proposed commentary provides
sufficient clarity as to what creditors
must do to comply with the requirement
to consider income or assets, debt
obligations, alimony, child support, and
DTI or residual income, and whether it
creates impediments to consideration of
other factors or data in making an ATR
determination. The Bureau also seeks
comment on whether it should retain
the monthly payment calculation
method for DTI, which it is proposing
to move from § 1026.43(e)(2)(vi)(B) to
proposed § 1026.43(e)(2)(v)(A).
The Bureau is proposing revisions to
§ 1026.43(e)(2)(v)(A) and related
commentary as part of the proposal to
eliminate the specific DTI limit. In
amending the General QM loan
definition under § 1026.43(e)(2), Bureau
is concerned about balancing various
factors, including the need for clarity
regarding QM status and for flexibility
as market underwriting practices evolve,
while also trying to ensure that creditors
making loans that receive QM status
have considered the consumers’
financial capacity and thus should
receive a presumption of compliance
with the ATR requirements. In
particular, the Bureau is concerned
about the potential that the price-based
approach may permit some loans to
receive QM status, even if creditors may
have originated those loans without
meaningfully considering the
consumer’s financial capacity because
they believe their risk of loss may be
limited by factors like a rising housing
price environment or the consumer’s
existing equity in the home. As
discussed in the January 2013 Final
Rule, the Bureau is aware of concerns
about creditors relying on factors related
to the value of the dwelling, like LTV
ratio, and how such reliance may have
contributed to the mortgage crisis.246
246 See id. at 6561 (Jan. 30, 2013) (‘‘In some cases,
lenders and borrowers entered into loan contracts
on the misplaced belief that the home’s value
would provide sufficient protection. These cases
included subprime borrowers who were offered
loans because the lender believed that the house
value either at the time of origination or in the near
future could cover any default. Some of these
borrowers were also counting on increased housing
values and a future opportunity to refinance; others
likely understood less about the transaction and
were at an informational disadvantage relative to
the lender.’’); id. at 6564 (‘‘During those periods
there were likely some lenders, as evidenced by the
existence of no-income, no-asset (NINA) loans, that
used underwriting systems that did not look at or
verify income, debts, or assets, but rather relied
primarily on credit score and LTV.’’); id. at 6559 (‘‘If
the lender is assured (or believes he is assured) of
recovering the value of the loan by gaining
possession of the asset, the lender may not pay
sufficient attention to the ability of the borrower to
repay the loan or to the impact of default on third
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Given these concerns, the Bureau also
seeks comment on whether proposed
§ 1026.43(e)(2)(v)(A) and its associated
commentary sufficiently address the
risk that loans with a DTI that is so high
or residual income that is so low that a
consumer may lack ability to repay can
obtain QM status. In particular, the
Bureau seeks comment on whether the
Rule should provide examples in which
a creditor has not considered the
required factors and, if so, what may be
appropriate examples. The Bureau also
requests comment on whether the Rule
should provide that a creditor does not
appropriately consider DTI or residual
income if a very high DTI ratio or low
residual income indicates that the
consumer lacks ability to repay but the
creditor disregards this information and
instead relies on the consumer’s
expected or present equity in the
dwelling, such as might be identified
through the consumer’s LTV ratio. The
Bureau also requests comment on
whether the Rule should specify which
compensating factors creditors may or
may not rely on for purposes of
determining the consumer’s ability to
repay. The Bureau also seeks comment
on the tradeoffs of addressing these
ability-to-repay concerns with
undermining the clarity of a loan’s QM
status. The Bureau also seeks comment
on the impact of the COVID–19
pandemic on how creditors consider
income or assets, debt obligations,
alimony, child support, and monthly
DTI ratio or residual income.
43(e)(2)(v)(B)
For the reasons discussed below, the
Bureau proposes to revise
§ 1026.43(e)(2)(v)(B) to provide that a
General QM loan is a covered
transaction for which the creditor, at or
before consummation, verifies the
consumer’s current or reasonably
expected income or assets other than the
value of the dwelling (including any
real property attached to the dwelling)
that secures the loan using third-party
parties. For very low LTV mortgages, i.e., those
where the value of the property more than covers
the value of the loan, the lender may not care at
all if the borrower can afford the payments. Even
for higher LTV mortgages, if prices are rising
sharply, borrowers with even limited equity in the
home may be able to gain financing since lenders
can expect a profitable sale or refinancing of the
property as long as prices continue to rise. . . . In
all these cases, the common problem is the failure
of the originator or creditor to internalize particular
costs, often magnified by information failures and
systematic biases that lead to underestimation of
the risks involved. The first such costs are simply
the pecuniary costs from a defaulted loan—if the
loan originator or the creditor does not bear the
ultimate credit risk, he or she will not invest
sufficiently in verifying the consumer’s ability to
repay.’’).
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records that provide reasonably reliable
evidence of the consumer’s income or
assets, in accordance with
§ 1026.43(c)(4) and verifies the
consumer’s current debt obligations,
alimony, and child support using
reasonably reliable third-party records
in accordance with § 1026.43(c)(3).
To clarify this requirement, the
Bureau proposes to add comments
43(e)(2)(v)(B)–1 through –3. Proposed
comment 43(e)(2)(v)(B)–1 would explain
that § 1026.43(e)(2)(v)(B) does not
prescribe specific methods of
underwriting that creditors must use. It
would provide that
§ 1026.43(e)(2)(v)(B)(1) requires a
creditor to verify the consumer’s current
or reasonably expected income or assets
(including any real property attached to
the value of the dwelling) that secures
the loan in accordance with
§ 1026.43(c)(4), which states that a
creditor must verify such amounts using
third-party records that provide
reasonably reliable evidence of the
consumer’s income or assets. The
proposed comment would provide
further that § 1026.43(e)(2)(v)(B)(2)
requires a creditor to verify the
consumer’s current debt obligations,
alimony, and child support in
accordance with § 1026.43(c)(3), which
states that a creditor must verify such
amounts using reasonably reliable thirdparty records. Proposed comment
43(e)(2)(v)(B)–1 would then clarify that,
so long as a creditor complies with the
provisions of § 1026.43(c)(3) with
respect to debt obligations, alimony, and
child support and § 1026.43(c)(4) with
respect to income and assets, the
creditor is permitted to use any
reasonable verification methods and
criteria.
Proposed comment 43(e)(2)(v)(B)–2
would clarify that ‘‘current and
reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan’’ is
determined in accordance with
§ 1026.43(c)(2)(i) and its commentary
and that ‘‘current debt obligations,
alimony, and child support’’ has the
same meaning as under
§ 1026.43(c)(2)(vi) and its commentary.
The proposed comment would further
clarify that § 1026.43(c)(2)(i) and (vi)
and the associated commentary apply to
a creditor’s determination with respect
to what inflows and property it may
classify and count as income or assets
and what obligations it must classify
and count as debt obligations, alimony,
and child support, pursuant to its
compliance with § 1026.43(e)(2)(v)(B).
The Bureau notes that proposed
comments 43(e)(2)(v)(B)–1 and –2
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would enable creditors to take into
account the effects of public
emergencies that affect consumers’
incomes when verifying a particular
consumer’s income. These proposed
comments would clarify that
§ 1026.43(e)(2)(v)(B) does not prescribe
precisely how creditors must verify the
consumer’s income or assets, debt
obligations, alimony, and child
support—merely that they must do so
using third-party records that are
reasonably reliable. As such, creditors
would have the flexibility to adjust their
verification methods in the event of an
emergency, such as the COVID–19
pandemic, that affects consumer
incomes.
Proposed comment 43(e)(2)(v)(B)–3.i
would explain further that a creditor
also complies with § 1026.43(e)(2)(v)(B)
if it satisfies one of the specific
verification standards the Bureau would
set forth in the rule. These standards
may include relevant provisions in
specified versions of the Fannie Mae
Single Family Selling Guide,247 the
Freddie Mac Single-Family Seller/
Servicer Guide,248 the FHA’s Single
Family Housing Policy Handbook,249
the VA’s Lenders Handbook,250 and the
USDA’s Field Office Handbook for the
Direct Single Family Housing
Program 251 and the Handbook for the
Single Family Guaranteed Loan
Program, current as of the date of this
proposal’s public release.252 The Bureau
seeks comment on whether these or
other verification standards should be
incorporated into proposed comment
43(e)(2)(v)(B)–3.i.
Proposed comment 43(e)(2)(v)(B)–3.ii
would clarify that a creditor complies
with § 1026.43(e)(2)(v)(B) if it complies
with requirements in the standards
listed in comment 43(e)(2)(v)(B)–3 for
creditors to verify income or assets, debt
obligations, alimony and child support
using specified guides or to include or
247 Fed. Nat’l Mortgage Assoc., Single Family
Selling Guide (2020), https://sellingguide.fanniemae.com/.
248 Fed. Home Loan Mort. Corp., The SingleFamily Seller/Servicer Guide (2020), https://
guide.freddiemac.com/app/guide/.
249 U.S. Dep’t of Hous. & Urban Dev., Single
Family Housing Policy Handbook 4000.1 (2019),
https://www.hud.gov/program_offices/housing/sfh/
handbook_4000-1.
250 U.S. Dept. of Veterans Affairs, Lenders
Handbook-VA Pamphlet 26–7 (2019), https://
www.benefits.va.gov/WARMS/pam26_7.asp.
251 U.S. Dep’t of Agric. Rural Hous. Serv., Direct
Single Family Housing Loans and Grants-Field
Office Handbook HB–1–3550 (2019), https://
www.rd.usda.gov/resources/directives/
handbooks#hb13555.
252 U.S. Dep’t of Agric. Rural Hous. Serv.,
Guaranteed Loan Program Technical Handbook
HB–1–3555 (2020), https://www.rd.usda.gov/
resources/directives/handbooks#hb13555.
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41751
exclude particular inflows, property,
and obligations as income, assets, debt
obligations, alimony, and child support.
For example, such requirements would
include a specified standard’s definition
of the term ‘‘self-employment income,’’
description of when the creditor may
use self-employment income as
qualifying income for a mortgage, and
explanation of how the creditor must
document self-employment income.
Proposed comment 43(e)(2)(v)(B)–3.iii
would clarify that, for purposes of
compliance with § 1026.43(e)(2)(v)(B), a
creditor need not comply with
requirements in the standards listed in
comment 43(e)(2)(v)(B)–3.i other than
those that require creditors to verify
income, assets, debt obligations,
alimony, and child support using
specified documents or to classify
particular inflows, property, and
obligations as income, assets, debt
obligations, alimony, and child support.
For example, a standard the Bureau
would specify may include information
on the use of DTI ratios. Because such
information is not a requirement to
verify income, assets, debt obligations,
alimony and child support using
specified documents or to classify
particular inflows, property, and
obligations as income, assets, debt
obligations, alimony, and child support,
a creditor would need not comply with
this requirement to be eligible to receive
a safe harbor as described in comment
43(e)(2)(v)(B)–3.i.
Proposed comment 43(e)(2)(v)(B)–3.iv
would clarify that a creditor also
complies with § 1026.43(e)(2)(v)(B) if it
complies with revised versions of
standards that the Bureau would specify
in comment 43(e)(2)(v)(B)–3, provided
that the two versions are substantially
similar. This provision is intended to
allow creditors to use new versions of
standards without the Bureau needing
to amend the commentary unless the
new versions of the standards deviate in
important respects from the older
versions of the standards.
Finally, proposed comment
43(e)(2)(v)(B)–3.v would clarify that a
creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
the verification requirements in one or
more of the standards the Bureau would
specify in comment 43(e)(2)(v)(B)–3.i.
The proposed comment would provide
further that a creditor may, but need
not, comply with § 1026.43(e)(2)(v)(B)
by complying with the verification
requirements from more than one
standard (in other words, by ‘‘mixing
and matching’’ verification
requirements). For example, if a creditor
complies with the requirements in one
of the standards the Bureau would
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specify for when the creditor may use
‘‘self-employment income,’’ and also
complies with the requirements in a
different standard the Bureau would
specify regarding certain vested assets,
the creditor complies with
§ 1026.43(e)(2)(v)(B) and receives a safe
harbor as described in comment
43(e)(2)(v)(B)–3.i with respect to those
determinations. A creditor that chooses
to comply with the verification
requirements from more than one
standard need not satisfy all of the
verification requirements in each of the
standards it uses.
The Bureau proposes these revisions
because it preliminarily concludes that
they may help ensure that the Rule’s
verification requirements are clear and
detailed enough to provide creditors
with sufficient certainty about whether
a loan satisfies the General QM loan
definition. Without such certainty,
creditors may be less likely to provide
General QM loans to consumers,
reducing the availability of responsible,
affordable mortgage credit to consumers.
The Bureau also seeks to ensure that the
Rule’s verification requirements are
flexible enough to adapt to emerging
issues with respect to the treatment of
certain types of debt or income,
advancing the provision of responsible,
affordable credit to consumers.
To further these objectives, the
Bureau is proposing to remove the
requirement that creditors verify the
consumer’s income or assets, debt
obligations, alimony, and child support
in accordance with appendix Q and to
add commentary clarifying that a
creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
verification standards the Bureau would
specify. The Bureau encourages
stakeholders to develop additional
verification standards that the Bureau
could incorporate into the safe harbor
set forth in proposed comment
43(e)(2)(v)(B)–3. Stakeholder standards
also could incorporate, in whole or in
part, any standards that the Bureau
specifies as providing a safe harbor,
including mixing and matching these
standards. The Bureau thus welcomes
the submission of stakeholderdeveloped verification standards and
would review any such standards for
potential inclusion in the safe harbor.
In the January 2013 Final Rule, the
Bureau adopted the requirement that
creditors verify the consumer’s income
or assets, debt obligations, alimony, and
child support in accordance with
appendix Q. The Bureau believed this
requirement would provide certainty to
creditors as to whether a loan meets the
General QM loan definition and would
not deter creditors from providing QMs
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to consumers.253 However, appendix Q
has not achieved this goal. The
Assessment Report highlighted three
concerns with appendix Q. First, the
Report stated that appendix Q lacks the
high degree of specific detail that is
provided by, for example, Fannie Mae’s
Seller Guide and Freddie Mac’s Seller/
Servicer Guide.254 Second, the Report
noted that there is a perceived lack of
clarity in appendix Q. As the Report
noted, commenters on the Assessment
RFI stated that appendix Q ‘‘is
ambiguous and leads to uncertainty’’
and is ‘‘confusing and unworkable,’’ and
that ‘‘additional guidance . . . is
needed.’’ 255 Third, the Report noted
that appendix Q has been static since its
adoption, while the GSEs regularly
update and adjust their guidelines in
response to, among other things,
emerging issues with respect to the
treatment of certain types of debt or
income.256 The Assessment Report
found that such concerns ‘‘may have
contributed to investors’—and at least
derivatively, creditors’—preference’’ for
Temporary GSE QM loans instead of
originating loans under the General QM
loan definition.257 Commenters
responding to the ANPR also raised
similar concerns, but some commenters
also recommended maintaining
appendix Q as an option for
compliance.
As described above in part III, the
ANPR solicited comment on whether
the rule should retain appendix Q as the
standard for calculating and verifying
debt and income.258 Nearly all
commenters agreed that appendix Q in
its existing form is insufficient—
specifically, that the requirements
lacked clarity in certain areas,
particularly with respect to the
application of the standards to
consumers who are self-employed or
otherwise have non-traditional income.
These commenters stated that this lack
of clarity leaves creditors uncertain of
the QM status of some loans.
Commenters also criticized appendix Q
for being overly prescriptive and
outdated in other areas and therefore
lacking the flexibility to adapt to
253 78
FR 6408, 6523 (Jan. 30, 2013).
Assessment Report, supra note 58, at 193.
254 See
255 Id.
at 193–94.
at 193.
258 Specifically, the Bureau sought comment on
whether the rule should retain appendix Q as the
standard for verification if the rule retains a direct
measure of a consumer’s personal finances for
General QM. Even though the Bureau is proposing
to remove the DTI ratio requirement, the question
about retention of appendix Q remains relevant
because the proposal would require creditors to
verify income, assets, debt obligations, alimony,
and child support.
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257 Id.
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changing market conditions.
Commenters suggested that the Bureau
supplement appendix Q or replace it
with reasonable alternatives that allow
for more flexibility, such as a general
reasonability standard for verifying
income and debt or verification
standards issued by the GSEs, FHA,
USDA, or VA. Commenters also stated
that appendix Q hampers innovation
because it is incompatible with
practices such as digital underwriting.
Although most commenters advocated
for elimination of appendix Q, the
commenters that advocated for retaining
appendix Q generally suggested the
Bureau should revise appendix Q to
modernize the standards and ease
industry compliance.
The Bureau tentatively determines
that, due to the well-founded and
consistent concerns described above,
appendix Q does not provide sufficient
compliance certainty to creditors and
does not provide flexibility to adapt to
emerging issues with respect to the
treatment of certain types of debt or
income categories. The Bureau
recognizes that some findings in the
Assessment Report suggest that the
issues raised by creditors with respect to
appendix Q do not appear to have had
a substantial impact for certain loans.
For example, although creditors have
stated that it may be difficult to comply
with certain appendix Q requirements
for self-employed borrowers, the
Assessment Report noted that
application data indicated that the
approval rates for non-high DTI, nonGSE eligible self-employed borrowers
have decreased by only two percentage
points since the January 2013 Final Rule
became effective.259 The Bureau
tentatively concludes, however, that this
limited decrease in approvals for such
applications does not undermine
creditors’ concerns that appendix Q’s
definitions of debt and income are rigid
and difficult to apply and do not
provide the level of compliance
certainty that the Bureau anticipated in
the January 2013 Final Rule.
Additionally, the Assessment Report
showed that about 40 percent of
respondents to a lender survey
indicated that they ‘‘often’’ or
‘‘sometimes’’ originate non-QM loans
where the borrower could not provide
documentation required by appendix Q.
The Bureau concluded that these results
left open the possibility that appendix Q
requirements may have had an impact
on access to credit.260
The Bureau thus proposes to remove
the appendix Q requirements from
259 See
260 See
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§ 1026.43(e)(2)(v), and to remove
appendix Q from Regulation Z entirely.
The Bureau proposes to remove
appendix Q entirely in light of concerns
from creditors and investors that its
perceived inflexibility, ambiguity, and
static nature result in standards that are
both confusing and outdated. The
Bureau understands it would be timeand resource-intensive to revise
appendix Q in a manner that would
resolve these concerns. The Bureau
tentatively concludes that a more
efficient and practicable solution is to
propose to remove appendix Q entirely.
As described above, the proposal
would instead provide that creditors
must verify income, assets, debt
obligations, alimony, and child support
in accordance with the general ATR
verification provisions. The proposal
would also provide a safe harbor for
compliance with § 1026.43(e)(2)(v)(B) if
a creditor complies with verification
requirements in standards the Bureau
would specify in comment
43(e)(2)(v)(B)–3. Because the Bureau
believes that the general ATR
verification provisions and external
standards the Bureau would specify
would provide a workable approach,
and because the Bureau preliminarily
agrees that the existing concerns with
appendix Q discussed above have merit,
the Bureau is not proposing to retain
appendix Q as an option for creditors to
comply with the requirements of
§ 1026.43(e)(2)(v) to consider and verify
a consumer’s income, assets, debt
obligations, alimony, and child support.
As proposed comment 43(e)(2)(v)(B)–1
makes clear, creditors would still be
required to verify the consumer’s
income or assets in accordance with
§ 1026.43(c)(4) and its commentary and
verify the consumer’s current debt
obligations, alimony, and child support
in accordance with § 1026.43(c)(3) and
its commentary.
As noted above, the proposal would
also provide a safe harbor for
compliance with § 1026.43(e)(2)(v)(B)
where a creditor complies with
verification requirements in standards
the Bureau specifies. These may include
relevant provisions from Fannie Mae’s
Single Family Selling Guide, Freddie
Mac’s Single-Family Seller/Servicer
Guide, FHA’s Single Family Housing
Policy Handbook, the VA’s Lenders
Handbook, and the USDA’s Field Office
Handbook for the Direct Single Family
Housing Program as well as its
Handbook for the Single Family
Guaranteed Loan Program, current as of
this proposal’s public release. All of
these verification standards are
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available to the public for free online.261
As discussed above, the Bureau is also
open to including stakeholderdeveloped verification standards among
this list of guides such that a creditor’s
compliance with such verification
standards would provide conclusive
evidence of compliance with
§ 1026.43(e)(2)(v)(B).
The Bureau tentatively determines,
based on extensive public feedback and
its own experience and review, that
external standards appear reasonable
and would provide creditors with
substantially greater certainty about
whether many loans satisfy the General
QM loan definition—particularly with
respect to verifying income for selfemployed consumers, consumers with
part-time employment, and consumers
with irregular or unusual income
streams. The Bureau tentatively
determines that these types of income
would be addressed more fully by
certain external standards than by
appendix Q. The Bureau tentatively
determines that, as a result, this
proposal would increase access to
responsible, affordable credit for
consumers.
The Bureau emphasizes that a creditor
would not be required to comply with
any of the verification requirements in
the standards the Bureau would specify
in comment 43(e)(2)(v)(B)–3.i in order to
comply with § 1026.43(e)(2)(v)(B).
Rather, the Bureau is proposing to
clarify that compliance with these
standards constitutes compliance with
the verification requirements of
§ 1026.43(c)(3) and (c)(4) and their
commentary, which generally require
creditors to verify income, assets, debt
obligations, alimony, and child support
using reasonably reliable third-party
records. The Bureau tentatively
determines that this would help address
the concerns of many creditors and
commenters that appendix Q has not
facilitated adequate compliance
certainty.
The Bureau also tentatively
determines that the proposal would
provide creditors with the flexibility to
develop other methods of compliance
261 The current versions of the guides (as of June
17, 2020) are available on the respective Federal
agency and GSE websites. The current versions of
the Federal agency guides noted above will be
posted with the proposed rule on https://
www.regulations.gov. In the event that the GSEs
replace the current versions of the guides noted
above with new versions of the guides on their
websites during the comment period, the version
current as of June 17, 2020 of Fannie Mae’s Single
Family Selling Guide will be available at https://
www.allregs.com/tpl/public/fnma_freesiteconv_
tll.aspx, and the version current as of June 17, 2020
of Freddie Mac’s Single-Family Seller/Servicer
Guide will be available at https://www.allregs.com/
tpl/public/fhlmc_freesite_tll.aspx.
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with the verification requirements of
§ 1026.43(e)(2)(v)(B), consistent with
§ 1026.43(c)(3) and (c)(4) and their
commentary, an option that the Bureau
intends to address the concerns of
creditors and commenters that found
appendix Q to be too rigid or
prescriptive. As explained in proposed
comment 43(e)(2)(v)(B)–1,
§ 1026.43(e)(2)(v)(B) does not prescribe
specific methods of underwriting, and
so long as a creditor complies with
§ 1026.43(c)(3) and (c)(4), the creditor is
permitted to use any reasonable
verification methods and criteria.
Furthermore, as proposed comment
43(e)(2)(v)(B)–3.v would clarify,
creditors would have the flexibility to
‘‘mix and match’’ the verification
requirements in the standards the
Bureau would specify in comment
43(e)(2)(v)(B)–3.i, and receive a safe
harbor with respect to verification that
is made consistent with those standards.
The Bureau also proposes to explain
in proposed comment 43(e)(2)(v)(B)–3.iv
that a creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
revised versions of the standards the
Bureau would specify in comment
43(e)(2)(v)(B)–3.i, provided that the two
versions are substantially similar. Many
of the standards that the Bureau could
specify in comment 43(e)(2)(V)(B)–3.i,
such as GSE and Federal agency
standards, are regularly updated in
response to emerging issues with
respect to the treatment of certain types
of debt or income. This proposed
comment would explain that the safe
harbor described in comment
43(e)(2)(v)(B)–3.i applies not only to
verification requirements in the specific
versions of the standards listed, but also
revised versions of these standards, as
long as the revised version is
substantially similar.
The Bureau is aware, based on
comments received on the ANPR, that
some creditors would prefer that
compliance with any future version of
the standards the Bureau specifies,
rather than just the versions of those
standards the Bureau would specify in
comment 43(e)(2)(v)(B)–3.i (as well as
any substantially similar version, under
proposed comment 43(e)(2)(v)(B)–3.iv),
be automatically deemed to constitute
compliance with the verification
requirements of § 1026.43(c)(3) and
(c)(4). However, such an approach
would mean that any future revisions to
those standards by the third parties that
issue them could cause significant
changes in the creditor obligations and
consumer protections under the Rule
without review by the Bureau. For this
reason, the Bureau is not proposing
such an approach.
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As in the January 2013 Final Rule, the
Bureau is proposing to incorporate the
requirement that the creditor verify the
consumer’s current debt obligations,
alimony, and child support into the
definition of a General QM loan in
§ 1026.43(e)(2) pursuant to its authority
under TILA section 129C(b)(3)(B)(i). The
Bureau is also proposing the revisions to
the commentary to
§ 1026.43(e)(2)(v)(B)—including the
clarification that a creditor complies
with the General QM loan verification
requirement where it complies with
certain verification standards issued by
third parties that the Bureau would
specify—pursuant to its authority under
TILA section 129C(b)(3)(B)(i). The
Bureau tentatively finds that these
provisions would be necessary and
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner that
is consistent with the purposes of TILA
section 129C and necessary and
appropriate to effectuate the purposes of
TILA section 129C, which includes
assuring that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loan.
The Bureau also proposes these
provisions pursuant to its authority
under TILA section 105(a) to issue
regulations that, among other things,
contain such additional requirements,
other provisions, or that provide for
such adjustments for all or any class of
transactions, that in the Bureau’s
judgment are necessary or proper to
effectuate the purposes of TILA, which
include the above purpose of section
129C, among other things. The Bureau
tentatively finds that these provisions
would be necessary and proper to
achieve this purpose. In particular, the
Bureau tentatively finds that
incorporating the requirement that a
creditor verify a consumer’s current
debt obligations, alimony, and child
support into the General QM loan
criteria—as well as clarifying that a
creditor complies with the General QM
verification requirement where it
complies with certain verification
standards issued by third parties that
the Bureau would specify—would
ensure that creditors verify whether a
consumer has the ability to repay a
General QM loan. Finally, the Bureau
concludes that these regulatory
amendments are authorized by TILA
section 129C(b)(2)(A)(vi), which
permits, but does not require, the
Bureau to adopt guidelines or
regulations relating to debt-to-income
ratios or alternative measures of ability
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to pay regular expenses after payment of
total monthly debt.
The Bureau seeks comment on
proposed § 1026.43(e)(2)(v)(B) and
related commentary, including on
whether it should retain appendix Q as
an option for complying with the Rule’s
verification standards. In addition, the
Bureau requests comment on whether
proposed § 1026.43(e)(2)(v)(B) and
related commentary would facilitate or
create obstacles to verification of
income, assets, debt obligations,
alimony, and child support through
automated analysis of electronic
transaction data from consumer account
records. The Bureau also requests
comment on whether the Rule should
include a safe harbor for compliance
with certain verification standards, as
the Bureau proposes in proposed
comment 43(e)(2)(v)(B)–3, and, if so,
what verification standards the Bureau
should specify for the safe harbor. The
Bureau also requests comment about the
advantages and disadvantages of the
verification requirements in each
possible standard the Bureau could
specify for the safe harbor, including: (1)
Chapters B3–3 through B3–6 of the
Fannie Mae Single Family Selling
Guide, published June 3, 2020; (2)
sections 5102 through 5500 of the
Freddie Mac Single-Family Seller/
Servicer Guide, published June 10,
2020; (3) sections II.A.1 and II.A.4–5 of
the FHA’s Single Family Housing Policy
Handbook, issued October 24, 2019; (4)
chapter 4 of the VA’s Lenders
Handbook, revised February 22, 2019;
(5) chapter 4 of the USDA’s Field Office
Handbook for the Direct Single Family
Housing Program, revised March 15,
2019; and (6) chapters 9 through 11 of
the USDA’s Handbook for the Single
Family Guaranteed Loan Program,
revised March 19, 2020. In addition, the
Bureau requests comment on whether
creditors that comply with standards
that have been revised but are
substantially similar should receive a
safe harbor, as the Bureau proposes. The
Bureau further seeks comment on
whether the Rule should include
examples of revisions that might qualify
as substantially similar, and if so, what
types of examples would provide
helpful clarification to creditors and
other stakeholders. For example, the
Bureau seeks comment on whether it
would be helpful to clarify that a
revision might qualify as substantially
similar where it is a clarification,
explanation, logical extension, or
application of a pre-existing proposition
in the standard. The Bureau also seeks
comment on its proposal to allow
creditors to ‘‘mix and match’’
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requirements from verification
standards, including whether examples
of such ‘‘mixing and matching’’ would
be helpful and whether the Bureau
should instead limit or prohibit such
‘‘mixing and matching,’’ and why.
Finally, the Bureau requests comment
on whether the Bureau should specify
in the safe harbor existing stakeholder
standards or standards that stakeholders
develop that define debt and income.
The Bureau seeks comment on whether
the potential inclusion or non-inclusion
of Federal agency or GSE verification
standards in the safe harbor in the
future would further encourage
stakeholders to develop such standards.
43(e)(2)(vi)
TILA section 129C(b)(2)(vi) states that
the term ‘‘qualified mortgage’’ includes
any mortgage loan that complies with
any guidelines or regulations
established by the Bureau relating to
ratios of total monthly debt to monthly
income or alternative measure of ability
to pay regular expenses after payment of
total monthly debt, taking into account
the income levels of the consumer and
such other factors as the Bureau may
determine relevant and consistent with
the purposes described in TILA section
129C(b)(3)(B)(i). TILA section
129C(b)(3)(B)(i) authorizes the Bureau to
revise, add to, or subtract from the
criteria that define a QM upon a finding
that the changes are necessary or proper
to ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C,
necessary and appropriate to effectuate
the purposes of TILA sections 129C and
129B, to prevent circumvention or
evasion thereof, or to facilitate
compliance with TILA sections 129C
and 129B. Current § 1026.43(e)(2)(vi)
implements TILA section 129C(b)(2)(vi),
consistent with TILA section
129C(b)(3)(B)(i), and provides that, as a
condition to be a General QM loan
under § 1026.43(e)(2), the consumer’s
total monthly DTI ratio may not exceed
43 percent. Section 1026.43(e)(2)(vi)
further provides that the consumer’s
total monthly DTI ratio is generally
determined in accordance with
appendix Q.
For the reasons described in part V
above, the Bureau is proposing to
remove the 43 percent DTI limit in
current § 1026.43(e)(2)(vi) and replace it
with a price-based approach. The
proposal also would require a creditor
to consider and verify the consumer’s
debt, income, and monthly DTI ratio or
residual income. Specifically, the
Bureau proposes to remove the text of
current § 1026.43(e)(2)(vi) and to
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provide instead that, to be a General QM
loan under § 1026.43(e)(2), the APR may
not exceed APOR for a comparable
transaction as of the date the interest
rate is set by the amounts specified in
§ 1026.43(e)(2)(vi)(A) through (E).262
Proposed § 1026.43(e)(2)(vi)(A) through
(E) would provide specific rate spread
thresholds for purposes of
§ 1026.43(e)(2), including higher
thresholds for small loan amounts and
subordinate-lien transactions. Proposed
§ 1026.43(e)(2)(vi)(A) would provide
that for a first-lien covered transaction
with a loan amount greater than or equal
to $109,898 (indexed for inflation), the
APR may not exceed APOR for a
comparable transaction as of the date
the interest rate is set by two or more
percentage points. Proposed
§ 1026.43(e)(2)(vi)(B) and (C) would
provide higher thresholds for smaller
first-lien covered transactions. Proposed
§ 1026.43(e)(2)(vi)(D) and (E) would
provide higher thresholds for
subordinate-lien covered transactions.
Loans priced at or above the thresholds
in proposed § 1026.43(e)(2)(vi)(A)
through (E) would not be eligible for
QM status under § 1026.43(e)(2). The
proposal would also provide that the
loan amounts specified in
§ 1026.43(e)(2)(vi)(A) through (E) be
adjusted annually for inflation based on
changes in the Consumer Price Index for
All Urban Consumers (CPI–U).
Proposed § 1026.43(e)(2)(vi) would
also provide a special rule for
determining the APR for purposes of
determining a loan’s status as a General
QM loan under § 1026.43(e)(2) for
certain ARMs and other loans for which
the interest rate may or will change in
the first five years of the loan.
Specifically, proposed
§ 1026.43(e)(2)(vi) would provide that,
for purposes of § 1026.43(e)(2)(vi), the
creditor must determine the APR for a
loan for which the interest rate may or
will change within the first five years
after the date on which the first regular
periodic payment will be due by
treating the maximum interest rate that
may apply during that five-year period
as the interest rate for the full term of
the loan.
The Bureau is proposing these
revisions to § 1026.43(e)(2)(vi) for the
reasons set forth above in part V. As
explained above, the Bureau is
262 As explained above in the section-by-section
discussion of § 1026.43(e)(2)(v)(A), the Bureau is
proposing to move to § 1026.43(e)(2)(v)(A) the
provisions in existing § 1026.43(e)(2)(vi)(B), which
specify that the consumer’s monthly DTI ratio is
determined using the consumer’s monthly payment
on the covered transaction and any simultaneous
loan that the creditor knows or has reason to know
will be made.
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proposing to remove the 43 percent DTI
limit in current § 1026.43(e)(2)(vi) and
replace it with a price-based approach
because the Bureau is concerned that
retaining the existing General QM loan
definition with the 43 percent DTI limit
after the expiration of Temporary GSE
QM loan definition expires would
significantly reduce the size of QM and
could significantly reduce access to
responsible, affordable credit. The
Bureau is proposing a price-based
approach to replace the specific DTI
limit approach because it is concerned
that imposing a DTI limit as a condition
for QM status under the General QM
loan definition may be overly
burdensome and complex in practice
and may unduly restrict access to credit
because it provides an incomplete
picture of the consumer’s financial
capacity. The Bureau preliminarily
concludes that a price-based General
QM loan definition is appropriate
because a loan’s price, as measured by
comparing a loan’s APR to APOR for a
comparable transaction, is a strong
indicator of a consumer’s ability to
repay and is a more holistic and flexible
measure of a consumer’s ability to repay
than DTI alone.
The Bureau also proposes to remove
current comment 43(e)(2)(vi)–1, which
relates to the calculation of monthly
payments on a covered transaction and
for simultaneous loans for purposes of
calculating the consumer’s DTI ratio
under current § 1026.43(e)(2)(vi). The
Bureau believes this comment would be
unnecessary under the proposal to move
the text of current § 1026.43(e)(2)(vi)
and revise it to remove the references to
appendix Q. The Bureau proposes to
replace current comment 43(e)(2)(vi)–1
with a cross-reference to comments
43(b)(4)–1 through –3 for guidance on
determining APOR for a comparable
transaction as of the date the interest
rate is set. The Bureau also proposes
new comment 43(e)(2)(vi)–2, which
provides that a creditor must determine
the applicable rate spread threshold
based on the face amount of the note,
which is the ‘‘loan amount’’ as defined
in § 1026.43(b)(5). In addition, the
Bureau proposes comment 43(e)(2)(vi)–
3 in which it will publish the annually
adjusted loan amounts to reflect changes
in the CPI–U. The Bureau also proposes
new comment 43(e)(2)(vi)–4, which
explains the proposed special rule that,
for purposes of § 1026.43(e)(2)(vi), the
creditor must determine the APR for a
loan for which the interest rate may or
will change within the first five years
after the date on which the first regular
periodic payment will be due by
treating the maximum interest rate that
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41755
may apply during that five-year period
as the interest rate for the full term of
the loan. The guidance provided in
proposed comment 43(e)(2)(vi)–4 is
discussed further, below.
The Bureau proposes to adopt a pricebased approach to defining General QM
loans in § 1026.43(e)(2)(vi) pursuant to
its authority under TILA section
129C(b)(3)(B)(i). The Bureau
preliminarily concludes that a pricebased approach to the General QM loan
definition is necessary and proper to
ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner that is
consistent with the purposes of TILA
section 129C and is necessary and
appropriate to effectuate the purposes of
TILA section 129C, which includes
assuring that consumers are offered and
receive residential mortgage loans on
terms that reasonably reflect their ability
to repay the loan. As noted above, the
Bureau is concerned that, when the
Temporary GSE QM loan definition
expires, there would be a significant
reduction in access to credit if the
Bureau retained the existing General
QM loan definition with the 43 percent
DTI limit. The Bureau preliminarily
concludes that a price-based General
QM loan definition is appropriate
because a loan’s price, as measured by
comparing a loan’s APR to APOR for a
comparable transaction, is a strong
indicator of a consumer’s ability to
repay. Further, the Bureau preliminarily
concludes that a price-based approach is
a more holistic and flexible measure of
a consumer’s ability to repay than DTI
ratios alone, and therefore would better
promote access to credit by providing
QM status to consumers with DTI ratios
above 43 percent for whom it may be
appropriate to presume ability to repay.
As such, the Bureau preliminarily
concludes that a price-based approach
to the General QM loan definition
would both ensure that responsible,
affordable mortgage credit remains
available to consumers and assure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loan. For these same reasons, the
Bureau also proposes to adopt a pricebased requirement in § 1026.43(e)(2)(vi)
pursuant to its authority under TILA
section 105(a) to issue regulations that,
among other things, contain such
additional requirements or other
provisions, or that provide for such
adjustments for all or any class of
transactions, that in the Bureau’s
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judgment are necessary or proper to
effectuate the purposes of TILA, which
include the above purpose of section
129C, among other things. The Bureau
preliminarily concludes that the pricebased addition to the QM criteria is
necessary and proper to achieve this
purpose, for the reasons described
above. Finally, the Bureau preliminarily
concludes a price-based approach is
authorized by TILA section
129C(b)(2)(A)(vi), which permits, but
does not require, the Bureau to adopt
guidelines or regulations relating to DTI
ratios or alternative measures of ability
to pay regular expenses after payment of
total monthly debt.
The General QM Loan Pricing
Thresholds
Proposed § 1026.43(e)(2)(vi)(A) would
establish the pricing threshold for most
General QM loans. Specifically,
proposed § 1026.43(e)(2)(vi)(A) would
provide that, for a first-lien covered
transaction with a loan amount greater
than or equal to $109,898 (indexed for
inflation), the APR may not exceed
APOR for a comparable transaction as of
the date the interest rate is set by two
or more percentage points. Loans that
are priced at or above the twopercentage point threshold would not be
eligible for QM status under
§ 1026.43(e)(2), except that, as discussed
below, the proposal provides higher
thresholds for loans with smaller loan
amounts and for subordinate-lien
transactions. As discussed above, for all
loans, the proposal preserves the current
thresholds in § 1026.43(e)(1)(i) that
separate safe harbor from rebuttable
presumption QMs, so that a loan that
otherwise meets the General QM loan
definition is a safe harbor QM if its APR
exceeds APOR for a comparable
transaction as of the date the interest
rate was set by less than 1.5 percentage
points for first-lien transactions, or 3.5
percentage points for subordinate-lien
transactions. Under the proposal, all
other QM loans would continue to be
considered rebuttable presumption QMs
under § 1026.43(e)(1)(ii).
In considering pricing thresholds for
the General QM loan definition, the
Bureau has placed particular emphasis
on balancing considerations related to
ensuring consumers’ ability to repay
with maintaining access to responsible,
affordable mortgage credit. The Bureau
tentatively concludes that, in general, a
two-percentage-point-over-APOR
threshold would strike the appropriate
balance between these two objectives.
As explained above, the Bureau uses
early delinquency rates as a proxy for
measuring whether a consumer had a
reasonable ability to repay at the time
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the loan was consummated. Here, the
Bureau analyzed early delinquency rates
in considering the pricing thresholds at
which a loan should be presumed to
comply with the ATR provisions. The
Bureau analyzed NMDB and HMDA
data to assess early delinquency rates
for first-lien purchase originations,
using both DTI and rate spread. The
data are summarized in Tables 1
through 6, above. Tables 5 and 6 show
the early delinquency rates for samples
of loans categorized by both their DTI
and their rate spread.
Table 5 shows early delinquency rates
for 2002–2008 first-lien purchase
originations in the NMDB. The 2002–
2008 time period corresponds to a
market environment that, in general,
demonstrates looser, higher-risk credit
conditions.263 The Bureau’s analyses
found direct correlations between rate
spreads and early delinquency rates
across all DTI ranges reviewed. Loans
with low rate spreads had relatively low
early delinquency rates even at high DTI
levels. The highest early delinquency
rates corresponded to loans with both
high rate spreads and high DTI ratios.
For loans with DTI ratios of 41 to 43
percent—the category in Table 5 that
includes the current DTI limit of 43
percent—the early delinquency rates
reached 16 percent at rate spreads
including and above 2.25 percentage
points over APOR. At rate spreads
inclusive of 1.75 through 1.99
percentage points over APOR—the
category that is just below the proposed
two-percentage-point rate spread
threshold—the early delinquency rate
reached 22 percent for DTI ratios of 61
to 70 percent. At DTI ratios of 41 to 43
percent and rate spreads inclusive of
1.75 through 1.99 percentage points
over APOR, the early delinquency rate
is 15 percent.
Table 6 shows average delinquency
statistics for 2018 NMDB first-lien
purchase originations that have been
matched to 2018 HMDA data. In
contrast to Table 5, the time period in
Table 6 corresponds to a market
environment that, in general,
demonstrates tighter, lower-risk credit
conditions.264 In the 2018 data in Table
6, early delinquency rates also increased
as rate spreads increased across each
range of DTI ratios analyzed, although
of a high-risk credit market
include very high unemployment and falling home
prices.
264 Characteristics of a low-risk credit market
include very low unemployment and rising home
prices. As noted above, this more recent sample of
data provides insight into early delinquency rates
under post-crisis lending standards for a dataset of
loans that had not undergone an economic
downturn.
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the overall performance of loans in the
Table 6 dataset was significantly better
than those represented in Table 5. For
loans with DTI ratios of 36 to 43
percent—the category in Table 6 that
includes the current DTI limit of 43
percent—early delinquency rates
reached 3.9 percent (at rate spreads of
at least 2 percentage points). The
highest early delinquency rate
associated with the proposed rate
spread threshold (less than 2 percentage
points over APOR) is 3.2 percent and
corresponds to loans with the DTI ratios
of 26 to 35 percent. At the same rate
spread threshold, the early delinquency
rate for the loans with the highest DTI
ratios is 2.3 percent.265
Although in Tables 5 and 6
delinquency rates rise with rate spread,
there is no clear point at which
delinquency rates accelerate.
Comparisons between a high-risk credit
market (Table 5) and a low-risk credit
market (Table 6) show substantial
expansion of early delinquency rates
during an economic downturn across all
rate spreads and DTI ratios. Data show
that, for example, prime loans that
experience a 0.2 percent early
delinquency rate in a low-risk market
might experience a 2 percent early
delinquency rate in a higher-risk
market, while subprime loans with a 4.2
percent early delinquency rate in a lowrisk market might experience a 19
percent early delinquency rate in a
higher-risk market.
As discussed above, other analyses
reviewed by the Bureau also show a
strong positive correlation of
delinquency rates with interest rate
spreads.266 Collectively, this evidence
suggests that higher rate spreads—
including the specific measure of APR
over APOR—are strongly correlated
with future early delinquency rates. The
Bureau expects that, for loans just below
the respective thresholds, a pricing
threshold of two percentage points over
APOR would generally result in similar
or somewhat higher early delinquency
rates relative to the current DTI limit of
43 percent. However, Bureau analysis
shows the early delinquency rate for
this set of loans is on par with loans that
have received QM status under the
Temporary GSE QM loan definition.
Restricting the sample of 2018 NMDB–
265 The apparent anomalies in the progression of
the early delinquency rates across DTI ratios at the
higher rate spread categories in Table 6 is likely
because there are relatively few loans in the 2018
data with the indicated combinations of higher rate
spreads and lower DTI ratios and some creditors
require that consumers demonstrate more
compensating factors on higher DTI loans.
266 See discussion of data and analyses provided
by CoreLogic and the Urban Institute, in part V,
above.
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HMDA matched first-lien conventional
purchase originations to only those
purchased and guaranteed by the GSEs,
loans with rate spreads at or above 2
percentage points had an early
delinquency rate of 4.2 percent, higher
than the maximum early delinquency
rates observed for loans with rate
spreads below 2 percentage points in
either Table 2 (2.7 percent) or Table 6
(3.2 percent).267 Consequently, the
Bureau does not believe that the pricebased approach would result in
substantially higher delinquency rates
than the standard included in the
current rule. Although some
commenters on the ANPR
recommended rate spread thresholds as
high as 2.5 percentage points over
APOR, the Bureau is not proposing a
higher General QM threshold for most
loans because of concerns that such
loans would have high predicted
delinquency rates, which appears
inconsistent with the goal of assuring
that consumers of loans that receive QM
status and the resulting presumption of
compliance with the ATR requirements
do, in fact, have ability to repay.
The Bureau has used 2018 HMDA
data to estimate that 95.8 percent of
conventional purchase loans currently
meet the criteria to be defined as QMs,
including under the Temporary GSE
QM loan definition. The Bureau also
uses 2018 HMDA data to project that the
proposed two-percentage-point-overAPOR threshold would result in a 96.1
percent market share for QMs with an
adjustment for small loans, as discussed
below.268 Creditors may also respond to
such a threshold by lowering pricing on
some loans near the threshold, further
increasing the QM market share.
Therefore, using the size of the QM
market as an indicator of access to
credit, the Bureau expects that a pricing
threshold of two percentage points over
APOR, in combination with the
proposed adjustments for small loans,
would result in an expansion of access
to credit as compared to the current rule
including the Temporary GSE QM loan
definition, particularly as creditors are
likely to adjust pricing in response to
267 This comparison uses 2018 data on GSE
originations because such loans were originated
while the Temporary GSE QM loan definition was
in effect and the GSEs were in conservatorship. GSE
loans from the 2002 to 2008 period were originated
under a different regulatory regime and with
different underwriting practices (e.g., GSE loans
more commonly had DTI ratios over 50 percent
during the 2002 to 2008 period), and thus may not
be directly comparable to loans made under the
Temporary GSE QM loan definition.
268 The Bureau estimates that alternative QM
pricing thresholds of 1.5, 1.75, 2.25, and 2.5
percentage points over APOR would result in QM
market shares of 94.3, 95.3, 96.6, and 96.8 percent,
respectively.
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the rule, allowing additional loans to
obtain QM status.269 Further, the
proposal would result in a substantial
expansion of access to credit as
compared to the current rule without
the Temporary GSE QM loan definition,
under which only an estimated 73.6
percent of conventional purchase loans
would be QMs.
The Bureau is concerned that rate
spread thresholds lower than two
percentage points over APOR could
result in a significant reduction in
access to credit when the Temporary
GSE QM definition expires. This is
especially true given the modest amount
of non-QM lending identified in the
Bureau’s Assessment Report, and the
recent sharp reduction in that lending in
recent months. The Bureau is also
concerned that a rate spread threshold
higher than two percentage points over
APOR would define a QM boundary
that substantially covers the entire
mortgage market, except for loans with
statutorily prohibited features,
including loans for which the early
delinquency rate suggests the consumer
may not have had a reasonable ability to
repay at consummation.
The Bureau preliminarily concludes
that, for most first-lien covered
transactions, a threshold of two
percentage points over APOR is an
appropriate criterion to include in the
definition of General QM in
§ 1026.43(e)(2)(vi). This proposed
threshold would appropriately balance
the certainty provided to the market
from ensuring that loans afforded QM
status may be presumed to comply with
the ATR provisions, with assurances
that access to responsible, affordable
mortgage credit remains available to
consumers.
The Bureau requests comment on
whether the final rule should establish
in § 1026.43(e)(2)(vi)(A) a different rate
spread threshold and, if so, what the
threshold should be. The Bureau
requests comment on whether the
General QM rate spread threshold
should be higher than 2 percentage
points over APOR. For commenters
suggesting a higher rate spread
threshold, the Bureau requests
commenters provide data or other
analysis that would support providing
QM status to such loans, which the
Bureau expects would have higher risk
profiles. The Bureau also requests
comment on whether the General QM
rate spread threshold should be set
269 The Bureau acknowledges, however, that some
loans that do not meet the current General QM loan
definition, but that would be General QMs under
the proposed price-based approach, would have
been made under other QM definitions (e.g., FHA,
small-creditor QM).
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41757
lower than 2 percentage points over
APOR. For commenters suggesting a
lower rate spread threshold, the Bureau
requests commenters provide data or
other analysis that would show that
adopting a lower threshold would not
have adverse effects on access to credit.
All commenters are encouraged to
include data or other analysis to support
their recommendations for a particular
threshold, including the proposed twopercentage-point-over-APOR threshold.
The Bureau also seeks comments on
whether creditors may be expected to
change lending practices in response to
the addition of any rate spread
threshold in the definition of General
QM (for example, by lowering interest
rates to fit within rate spread
thresholds), and how that would affect
the size of the QM market. In addition,
in light of the concerns about the
sensitivity of a price-based QM
definition to macroeconomic cycles, the
Bureau requests comment on whether
the Bureau should consider adjusting
the pricing thresholds in emergency
situations and, if so, how the Bureau
should do so.
Thresholds for Smaller Loans and
Subordinate-Lien Transactions
Proposed § 1026.43(e)(2)(vi)(B) and
(C) would establish higher pricing
thresholds for smaller loans, and loans
priced at or above the proposed
thresholds would not be eligible for QM
status under § 1026.43(e)(2).
Specifically, proposed
§ 1026.43(e)(2)(vi)(B) would provide
that, for first-lien covered transactions
with loan amounts greater than or equal
to $65,939 but less than $109,898,270 the
threshold would be 3.5 percentage
points over APOR. Proposed
§ 1026.43(e)(2)(vi)(C) would provide
that, for first-lien covered transactions
with loan amounts less than $65,939,
the threshold would be 6.5 percentage
points over APOR.
Proposed § 1026.43(e)(2)(vi)(D) and
(E) would establish higher thresholds
for subordinate-lien transactions, with
different thresholds depending on the
size of the transaction. Subordinate-lien
transactions priced at or above the
proposed thresholds would not be
270 The Bureau is proposing $65,939, rather than
a threshold such as $60,000 or $65,000, and
$109,898, rather than a threshold such as $100,000
or $110,000, because the proposed thresholds align
with certain thresholds for the limits on points and
fees, as updated for inflation, in § 1026.43(e)(3)(i)
and the associated commentary. The Bureau will
update these loan amounts if the corresponding
dollar amounts for § 1026.43(e)(3)(i) and the
associated commentary are updated before this final
rule becomes effective, in order to ensure that the
loan amounts for this provision and § 1026.43(e)(3)
remain synchronized.
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eligible for QM status under
§ 1026.43(e)(2). Specifically, proposed
§ 1026.43(e)(2)(vi)(D) would provide
that, for subordinate-lien covered
transactions with loan amounts greater
than or equal to $65,939, the threshold
would be 3.5 percentage points over
APOR. Proposed § 1026.43(e)(2)(vi)(E)
would provide that, for subordinate-lien
covered transactions with loan amounts
less than $65,939, the threshold would
be 6.5 percentage points over APOR.
The proposal would also provide that
the loan amounts specified in
§ 1026.43(e)(2)(vi)(A) through (E) be
adjusted annually for inflation based on
changes in CPI–U. Specifically, the
Bureau would adjust the loan amounts
in § 1026.43(e)(2)(vi) annually on
January 1 by the annual percentage
change in the CPI–U that was reported
on the preceding June 1. The Bureau
would publish adjustments in new
comment 43(e)(2)(vi)-3 after the June
figures become available each year.
The Bureau is proposing higher
thresholds for smaller loans because it
is concerned that loans with smaller
loan amounts are typically priced higher
than loans with larger loan amounts,
even though a consumer with a smaller
loan may have similar credit
characteristics and ability to repay.
Many of the creditors’ costs for a
transaction may be the same or similar,
regardless of the loan amount. For
creditors to recover their costs for
smaller loans, they may have to charge
higher interest rates or higher points
and fees as a percentage of the loan
amounts than they would for
comparable larger loans. As a result,
smaller loans may have higher APRs
than larger loans to consumers with
similar credit characteristics and who
may have a similar ability to repay. As
discussed below, the Bureau’s analysis
indicates that consumers who take out
smaller loans with APRs within higher
thresholds may have similar credit
characteristics as consumers who take
out larger loans. The Bureau’s analysis
also indicates that smaller loans with
APRs within higher thresholds may
have comparable levels of early
delinquencies as larger loans within
lower thresholds. However, as
explained further below, the Bureau’s
analysis of delinquency levels for
smaller loans, compared to larger loans,
does not appear to indicate a threshold
at which delinquency levels
significantly accelerate.
The Bureau is concerned that
adopting the same threshold of two
percentage points above APOR for all
loans could disproportionately prevent
smaller loans from being originated as
General QM loans. In particular, the
Bureau’s analysis indicates that without
higher thresholds for smaller loans,
loans for manufactured housing and
loans to minority consumers could
disproportionately be excluded from
being originated as General QM loans.
The Bureau’s analysis of 2018 HMDA
data found that 57.9 percent of
manufactured housing loans are priced
two percentage points or more over
APOR. The Bureau’s analysis also found
that 5.1 percent of site-built loans to
minority consumers are priced two
percentage points or more over APOR,
but 3.5 percent of site-built loans to
non-Hispanic white consumers are
priced two percentage points or more
over APOR. While some loans may be
originated under other QM definitions
or as non-QM loans, those loans may be
meaningfully more expensive, and some
loans may not be originated at all. As
discussed in part V, the non-QM market
has been slow to develop, and the
negative impact on the non-QM market
from the disruptions caused by the
COVID–19 pandemic raises further
concerns about the capacity of the nonQM market to provide consumers with
access to credit through such loans.
The Bureau also notes that, in the
Dodd-Frank Act, Congress provided for
additional pricing flexibility for
creditors making smaller loans, allowing
smaller loans to include higher points
and fees while still meeting the QM
definition. TILA section
129C(b)(2)(A)(vi) defines a QM as a loan
for which, among other things, the total
points and fees payable in connection
with the loan do not exceed 3 percent
of the total loan amount. However, TILA
section 129C(b)(2)(D) requires the
Bureau to prescribe rules adjusting the
points-and-fees limits for smaller loans.
In the January 2013 Final Rule, the
Bureau implemented this requirement
in § 1026.43(e)(3), adopting higher
points-and-fees thresholds for different
tiers of loan amounts less than or equal
to $100,000, adjusted for inflation. The
Bureau’s preliminary conclusion that
creditors originating smaller loans
typically impose higher points and fees
or higher interest rates to recover their
costs, regardless of the consumer’s
creditworthiness, and that higher
thresholds for smaller loans in
§ 1026.43(e)(2)(vi) may, therefore, be
appropriate, is consistent with the
statutory directive to adopt higher
points-and-fees thresholds for smaller
loans.
To develop the proposed thresholds
for smaller loans in
§ 1026.43(e)(2)(vi)(B) and (C), the
Bureau analyzed evidence related to
credit characteristics and loan
performance for first-lien purchase
transactions at various rate spreads and
loan amounts (adjusted for inflation)
using HMDA and NMDB data, as shown
in Table 9.271
TABLE 9—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF FIRST-LIEN TRANSACTIONS AT VARIOUS
RATE SPREADS
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Loan size group
Under
Under
Under
Under
Under
$65,939
$65,939
$65,939
$65,939
$65,939
....................
....................
....................
....................
....................
Rate spread range
(percentage points over
APOR)
1.5–2.0
1.5–2.5
1.5–3.0
1.5–3.5
1.5–4.0
...............................
...............................
...............................
...............................
...............................
271 See Bureau of Labor and Statistics, Historical
Consumer Price Index for All Urban Consumers
(CPI–U), https://www.bls.gov/cpi/tables/
supplemental-files/historical-cpi-u-202004.pdf.
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Mean CLTV,
2018 HMDA
Jkt 250001
Mean DTI,
2018 HMDA
81.9
82.2
82.1
81.9
81.7
32.3
32.3
32.2
32.1
32.3
(Using the CPI–U price index, nominal loan
amounts are inflated to June 2019 dollars from the
price level in June of the year prior to origination.
This effectively categorizes loans according to the
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Mean credit
score,
2018 HMDA
717
714
714
715
714
Percent
observed
60+ days
delinquent
within first
2 years,
2002–2008
NMDB
6.1%
6.1%
6.2%
6.2%
6.3%
Percent
observed
60+ days
delinquent
within first
2 years,
2018 NMDB
2.8%
2.3%
2.3%
2.5%
2.5%
inflation-adjusted thresholds for smaller loans that
would have been in effect on the origination date.)
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TABLE 9—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF FIRST-LIEN TRANSACTIONS AT VARIOUS
RATE SPREADS—Continued
Loan size group
Rate spread range
(percentage points over
APOR)
Under $65,939 ....................
Under $65,939 ....................
Under $65,939 ....................
Under $65,939 ....................
Under $65,939 ....................
Under $65,939 ....................
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$65,939 to $109,897 ...........
$109,898 and above ...........
1.5–4.5 ...............................
1.5–5.0 ...............................
1.5–5.5 ...............................
1.5–6.0 ...............................
1.5–6.5 ...............................
1.5 and above ....................
1.5–2.0 ...............................
1.5–2.5 ...............................
1.5–3.0 ...............................
1.5–3.5 ...............................
1.5–4.0 ...............................
1.5–4.5 ...............................
1.5–5.0 ...............................
1.5–5.5 ...............................
1.5–6.0 ...............................
1.5–6.5 ...............................
1.5 and above ....................
1.5–2.0 (for comparison) ....
The Bureau’s analysis indicates that
consumers with smaller loans with
APRs within higher potential
thresholds, such as 6.5 or 3.5 percentage
points above APOR, have similar credit
characteristics as consumers with larger
loans between 1.5 and 2 percentage
points above APOR.272 More
specifically, the Bureau analyzed 2018
HMDA data on first-lien conventional
purchase loans and found that loans
below $65,939 that are priced between
1.5 and 6.5 percentage points above
APOR have a mean DTI ratio of 33.1
percent, a mean combined LTV ratio of
81.9 percent, and a mean credit score of
685. Loans equal to or greater than
$65,939 but less than $109,898 that are
priced between 1.5 and 3.5 percentage
points above APOR have a mean DTI
ratio of 35.5 percent, a mean combined
LTV of 89.7 percent, and a mean credit
score of 703. Loans equal to or greater
than $109,898 that are priced between
1.5 and 2 percentage points above APOR
have a mean DTI ratio of 39.4 percent,
a mean combined LTV of 92.7 percent,
and a mean credit score of 698. These
all suggest that the credit characteristics,
and potentially the ability to repay, of
consumers taking out smaller loans with
higher APRs, may be at least comparable
to those of consumers taking out larger
loans with lower APRs.
272 Portfolio loans made by small creditors, as
defined in § 1026.35(b)(2)(iii)(B) and (C), are
excluded, as such loans are likely Small Creditor
QMs pursuant to § 1026.43(e)(5) regardless of
pricing.
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Mean CLTV,
2018 HMDA
Mean DTI,
2018 HMDA
81.7
81.7
81.6
81.7
81.9
82.0
89.9
90.1
90.0
89.7
89.4
89.3
89.1
89.1
89.2
89.3
89.3
92.7
32.5
32.6
32.7
32.9
33.1
33.3
35.5
35.4
35.5
35.5
35.6
35.7
35.8
35.9
36.0
36.1
36.1
39.4
With respect to early delinquencies,
the evidence summarized in Table 9
generally provides support for higher
thresholds for smaller loans. Loans less
than $65,939 had lower delinquency
rates than loans between $65,939 and
$109,897 across all rate spread ranges
and had delinquency rates lower than or
comparable to larger loans (equal to or
greater than $109,898) priced between
1.5 and 2 percentage points above
APOR. Loans between $65,939 and
$109,897 had lower delinquency rates
than larger loans between 2002 and
2008, but higher delinquency rates for
2018 loans.
More specifically, the Bureau
analyzed NMDB data from 2002 through
2008 on first-lien conventional purchase
loans and found that loans below
$65,939 that were priced between 1.5
and 6.5 percentage points above APOR
had an early delinquency rate of 6.5
percent. Loans equal to or greater than
$65,939 but less than $109,898 that
were priced between 1.5 and 3.5
percentage points above APOR had an
early delinquency rate of 13 percent.
Loans equal to or greater than $109,898
that were priced between 1.5 and 2
percentage points above APOR had an
early delinquency rate of 14.9 percent.
These rates suggest that the historical
loan performance of smaller loans with
higher APRs may be comparable, if not
better, than larger loans with lower
APRs.
However, the Bureau’s analysis found
that early delinquency rates for 2018
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Mean credit
score,
2018 HMDA
710
706
699
694
685
676
704
702
702
703
703
701
699
696
692
684
684
698
Percent
observed
60+ days
delinquent
within first
2 years,
2002–2008
NMDB
6.4%
6.4%
6.5%
6.5%
6.5%
6.6%
11.1%
12.2%
12.9%
13.0%
13.1%
13.2%
13.3%
13.4%
13.4%
13.4%
13.7%
14.9%
Percent
observed
60+ days
delinquent
within first
2 years,
2018 NMDB
2.6%
2.5%
2.4%
2.5%
3.4%
4.1%
3.4%
4.2%
4.2%
4.3%
4.0%
4.2%
4.1%
4.0%
4.2%
4.5%
4.5%
2.5%
loans are somewhat higher for smaller
loans with higher APRs than larger
loans with lower APRs. More
specifically, NMDB data from 2018 on
first-lien conventional purchase loans
show that loans below $65,939 that
were priced between 1.5 and 6.5
percentage points above APOR had an
early delinquency rate of 3.4 percent.
Loans equal to or greater than $65,939
but less than $109,898 that were priced
between 1.5 and 3.5 percentage points
above APOR had an early delinquency
rate of 4.3 percent. Loans equal to or
greater than $109,898 that were priced
between 1.5 and 2 percentage points
above APOR had an early delinquency
rate of 2.5 percent.
Although the current data do not
appear to indicate a particular threshold
at which the credit characteristics or
loan performance for smaller loans with
higher APRs decline significantly, the
Bureau preliminarily concludes that the
proposed thresholds in
§ 1026.43(e)(2)(vi)(B) and (C) for
smaller, first-lien covered transactions
would strike the right balance in
delineating which loans should be
eligible for a rebuttable presumption of
compliance with the ATR requirements.
The Bureau believes the proposed
thresholds may help ensure that
responsible, affordable credit remains
available to consumers taking out
smaller loans, in particular loans for
manufactured housing and loans to
minority consumers, while also helping
to ensure that the risks are limited so
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that it would be appropriate for those
loans to receive a rebuttable
presumption of compliance with the
ATR requirements.
The Bureau is proposing higher
thresholds in § 1026.43(e)(2)(vi)(D) and
(E) for subordinate-lien transactions
because it is concerned that
subordinate-lien transactions may be
priced higher than comparable first-lien
transactions for reasons other than
consumers’ ability to repay. In general,
the creditor of a subordinate lien will
recover its principal, in the event of
default and foreclosure, only to the
extent funds remain after the first-lien
creditor recovers its principal. Thus, to
compensate for this risk, creditors
typically price subordinate-lien
transactions higher than first-lien
transactions, even though the consumer
in the subordinate-lien transaction may
have similar credit characteristics and
ability to repay. In addition,
subordinate-lien transactions are often
for smaller loan amounts, so the pricing
factors discussed above for smaller loan
amounts may further increase the price
of subordinate-lien transaction,
regardless of the consumer’s ability to
repay. The Bureau is concerned that, to
the extent the higher pricing for
subordinate-lien transaction is not
related to consumers’ ability to repay,
subordinate-lien transactions may be
inappropriately excluded from QM
status under § 1026.43(e)(2) if the
pricing thresholds for subordinate-lien
transactions are not increased.
In the January 2013 Final Rule, the
Bureau adopted higher thresholds for
determining when subordinate-lien
QMs received a rebuttable presumption
or a conclusive presumption of
compliance with the ATR requirements.
For subordinate-lien transactions, the
definition of ‘‘higher-priced covered
transaction’’ in § 1026.43(b)(4) is used in
§ 1026.43(e)(1) to set a threshold of 3.5
percentage points above APOR to
determine which subordinate-lien QMs
receive a safe harbor and which receive
a rebuttable presumption of compliance.
As discussed above in part V, the
Bureau is not proposing to alter the
threshold for subordinate-lien
transactions in § 1026.43(b)(4). To avoid
the odd result that a subordinate-lien
transaction would otherwise be eligible
to receive a safe harbor under
§ 1026.43(b)(4) and (e)(1) but would not
be eligible for QM status under
§ 1026.43(e)(2)(vi), the Bureau
considered which threshold or
thresholds at or above 3.5 percentage
points above APOR may be appropriate
to propose for subordinate-lien
transactions in § 1026.43(e)(2)(vi).
To develop the proposed thresholds
for subordinate-lien transactions in
§ 1026.43(e)(2)(vi)(D) and (E), the
Bureau considered evidence related to
credit characteristics and loan
performance for subordinate-lien
transactions at various rate spreads and
loan amounts (adjusted for inflation)
using HMDA and Y–14M data, as shown
in Table 10.
TABLE 10—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF SUBORDINATE-LIEN TRANSACTIONS AT
VARIOUS RATE SPREADS
Rate spread range
(percentage points over APOR)
Loan size group
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Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
Under $65,939 ..................................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
$65,939 and above ...........................
2.0–2.5
2.0–3.0
2.0–3.5
2.0–4.0
2.0–4.5
2.0–5.0
2.0–5.5
2.0–6.0
2.0–6.5
2.0 and
2.0–2.5
2.0–3.0
2.0–3.5
2.0–4.0
2.0–4.5
2.0–5.0
2.0–5.5
2.0–6.0
2.0–6.5
2.0 and
In general, the Bureau’s analysis
found strong credit characteristics and
loan performance for subordinate-lien
loans at various thresholds above two
percentage points above APOR. The
current data do not appear to indicate a
particular threshold at which the credit
characteristics or loan performance
decline significantly.
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Mean CLTV,
2018 HMDA
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
above ..................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
above ..................................
76.9
78.4
79.7
80.1
80.2
80.3
80.3
80.3
80.4
80.7
79.5
80.5
81.0
81.3
81.3
81.5
81.6
81.6
81.7
81.8
With respect to larger subordinatelien transactions, the Bureau’s analysis
of 2018 HMDA data on subordinate-lien
conventional loans found that, for
consumers with subordinate-lien
transactions greater than or equal to
$65,939 that were priced 2 to 3.5
percentage points above APOR, the
mean DTI ratio was 37.4 percent, the
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Mean DTI,
2018 HMDA
36.1
36.5
36.8
36.9
36.9
37.0
37.1
37.1
37.2
37.3
37.2
37.3
37.4
37.5
37.6
37.7
37.7
37.8
37.9
37.9
Mean credit
score,
2018 HMDA
728
724
721
720
719
718
718
717
717
715
738
735
732
732
731
731
730
729
729
728
Percent
observed
90+ days
delinquent
within first
2 years,
2013–2016
Y–14M data
(subset)
2.1%
1.6%
1.4%
1.4%
1.3%
1.3%
1.3%
1.3%
1.3%
1.4%
1.9%
1.7%
1.6%
1.7%
1.7%
1.8%
1.8%
1.8%
1.8%
1.9%
mean combined LTV was 81 percent,
and the mean credit score was 732. The
Bureau also analyzed Y–14M loan data
for 2013 to 2016 and estimated that
subordinate-lien transactions greater
than or equal to $65,939 that were
priced 2 to 3.5 percentage points above
APOR had an early delinquency rate of
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approximately 1.6 percent.273 These
factors appear to provide a strong
indication of ability to repay, so the
Bureau preliminarily concludes that it
may be appropriate to set the threshold
at 3.5 percentage points above APOR for
subordinate-lien transactions to be
eligible for QM status under
§ 1026.43(e)(2). The Bureau recognizes
that, because the proposed price-based
approach would leave the threshold in
§ 1026.43(b)(4) for higher-priced QMs at
3.5 percentage points above APOR for
subordinate-lien transactions (and that
such transactions that are not higher
priced would, therefore, receive a safe
harbor under § 1026.43(e)(1)(i)), this
approach, if adopted, would result in
subordinate-lien transactions for
amounts over $65,939 either being a safe
harbor QM or not being eligible for QM
status under § 1026.43(e)(2). No such
loans would be eligible to be a
rebuttable presumption QM.
Nevertheless, the Bureau believes that
the proposed threshold may
appropriately balance the relatively
strong credit characteristics and loan
performance of these transactions
historically, which is indicative of
ability to repay, against the concern that
the supporting data are limited to recent
years with strong economic performance
and conservative underwriting.
For smaller subordinate-lien
transactions, the Bureau’s analysis of
2018 HMDA data on subordinate-lien
conventional loans found that for
consumers with subordinate-lien
transactions less than $65,939 with that
were priced between 2 and 6.5
percentage points above APOR, the
mean DTI ratio was 37.2 percent, the
mean combined LTV was 80.4 percent,
and the mean credit score was 717. The
Bureau also analyzed Y–14M loan data
for 2013 to 2016 and estimated that
subordinate-lien transactions less than
$65,939 that were priced between 2 and
6.5 percentage points above APOR, the
early delinquency rate was
approximately 1.3 percent. Based on
these relatively strong credit
characteristics and low delinquency
rates, the Bureau preliminarily
concludes that it may be appropriate to
set the threshold at 6.5 percentage
273 The loan data were a subset of the supervisory
loan-level data collected as part of the Board’s
Comprehensive Capital Analysis and Review,
known as Y–14M data. The early delinquency rate
measured the percentage of loans that were 90 or
more days late in the first two years. The Bureau
used loans with payments that were 90 or more
days late to measure delinquency, rather than the
60 or more days used with the data discussed above
for first-lien transactions, because the Y–14M data
do not include a measure for payments 60 or more
days late. Data from a small number of creditors
were not included due to incompatible formatting.
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points above APOR for subordinate-lien
transactions less than $65,939 to be
eligible for QM status under
§ 1026.43(e)(2). The Bureau notes that
under this proposal, subordinate-lien
transactions less than $65,939 priced
greater than or equal to 3.5 but less than
6.5 percentage points above APOR
would be eligible only for a rebuttable
presumption of compliance under
§ 1026.43(e)(1)(ii) and that consumers,
therefore, would have the opportunity
to rebut the presumption under
§ 1026.43(e)(1)(ii)(B).
The Bureau requests comment,
including data or other analysis, on
whether the final rule in
§ 1026.43(e)(2)(vi)(B) through (C) should
include different rate spread thresholds
at which smaller loans would be
considered General QM loans, and, if so,
what those thresholds should be.
Specifically, the Bureau requests
comment on whether the General QM
rate spread threshold for first-lien loans
should be higher or lower than the rate
spread ranges set forth in Table 9 for
such loans with loan amounts less than
$109,987 and greater than or equal to
$65,939 and for such loans with loan
amounts less than $65,939. For
example, the Bureau solicits comments
on whether a rate spread threshold of
less than 6.5 percentage points above
APOR for loan amounts less than
$65,939 would strike a better balance
between ability to repay and access to
credit, in particular with respect to
loans for manufactured housing and
loans to minority borrowers. For
commenters suggesting a different rate
spread threshold, the Bureau requests
commenters provide data or other
analysis that would support providing
General QM status to such loans taking
into account concerns regarding the
consumer’s ability to repay and adverse
effects on access to credit.
The Bureau also requests comment,
including data or other analysis, on
whether the final rule in
§ 1026.43(e)(2)(vi)(D) through (E) should
include different rate spread thresholds
at which subordinate-lien loans would
be considered General QM loans, and, if
so, what those thresholds should be.
Specifically, the Bureau requests
comment on whether the General QM
rate spread threshold for subordinatelien loans should be higher or lower
than the rate spread ranges set forth in
Table 10 for such loans with loan
amounts greater than or equal to
$65,939 and for such loans with loan
amounts less than $65,939. For
example, the Bureau solicits comments
on whether a rate spread threshold of
less than 6.5 percentage points above
APOR for subordinate-lien loans with
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loan amounts less than $65,939 would
strike a better balance between ability to
repay and access to credit. For
commenters suggesting a different rate
spread threshold, the Bureau requests
commenters provide data or other
analysis that would support providing
General QM status to such loans taking
into account concerns regarding the
consumer’s ability to repay and adverse
effects on access to credit.
The Bureau also requests comment,
including data and other analysis, on
whether the rule should include a DTI
limit for smaller loans and subordinatelien loans; for example, a DTI limit
between 45 and 48 percent, instead of
a pricing threshold or together with a
pricing threshold, and, if so, what those
limits should be. This includes
comment on whether the approach to
smaller loans and subordinate-lien loans
should differ from the approach to other
loans if the Bureau adopts one of the
alternatives outlined in part V.E above.
Determining the APR for Certain Loans
for which the Interest Rate May or Will
Change
The Bureau is also proposing to revise
§ 1026.43(e)(2)(vi) to include a special
rule for determining the APR for certain
types of loans for purposes of whether
a loan meets the General QM loan
definition under § 1026.43(e)(2). This
special rule would apply to loans for
which the interest rate may or will
change within the first five years after
the date on which the first regular
periodic payment will be due. For such
loans, for purposes of determining
whether the loan is a General QM loan
under § 1026.43(e)(2)(vi), the creditor
would be required to determine the APR
by treating the maximum interest rate
that may apply during that five-year
period as the interest rate for the full
term of the loan.274 The special rule in
the proposed revisions to
§ 1026.43(e)(2)(vi) would not modify
other provisions in Regulation Z for
determining the APR for other purposes,
such as the disclosures addressed in or
subject to the commentary to
§ 1026.17(c)(1).
The Bureau anticipates that the
proposed price-based approach to
defining General QM loans would in
general be effective in identifying which
loans consumers have the ability to
repay and should therefore be eligible
for QM status under § 1026.43(e)(2).
274 As discussed above in the section-by-section
analysis of proposed § 1026.43(b)(4), an identical
special rule for determining the APR for certain
loans for which the interest rate may or will change
also would apply under that paragraph for purposes
of determining whether a QM under § 1026.43(e)(2)
is a higher-priced covered transaction.
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However, the Bureau is concerned that,
absent the special rule, the proposed
price-based approach may less
effectively capture specific
unaffordability risks of certain loans for
which the interest rate may or will
change relatively soon after
consummation. Therefore, for loans for
which the interest rate may or will
change within the first five years after
the date on which the first regular
periodic payment will be due, a
modified approach to determining the
APR for purposes of the rate-spread
thresholds under proposed
§ 1026.43(e)(2) may be warranted.
Structure and pricing particular to
ARMs. The special rule in proposed
§ 1026.43(e)(2)(vi) would apply
principally to ARMs with initial fixedrate periods of five years or less
(referred to herein as ‘‘short-reset
ARMs’’).275 These loans may be
affordable for the initial fixed-rate
period but may become unaffordable
relatively soon after consummation if
the payments increase appreciably after
reset, causing payment shock. The APR
for short-reset ARMs may be less
predictive of ability to repay than for
fixed-rate mortgages because of how
ARMs are structured and priced and
how the APR for ARMs is determined
under various provisions in Regulation
Z. Several different provisions in
Regulation Z address the calculation of
the APR for ARMs. For disclosure
purposes, if the initial interest rate is
determined by the index or formula to
make later interest rate adjustments,
Regulation Z generally requires the
creditor to base the APR disclosure on
the initial interest rate at consummation
and to not assume that the rate will
increase during the remainder of the
loan.276 In some transactions, including
many ARMs, the creditor may set an
initial interest rate that is lower (or less
commonly, higher) than the rate would
be if it were determined by the index or
formula used to make later interest rate
275 In addition to short-reset ARMs, the proposed
special rule would apply to step-rate mortgages that
have an initial fixed-rate period of five years or less.
The Bureau recognizes that the interest rates in
step-rate mortgages are known at consummation.
However, unlike fixed-rate mortgages and akin to
ARMs, the interest rate of step-rate mortgages
changes, thereby raising the concern that interestrate increases relatively soon after consummation
may present affordability risks due to higher loan
payments. Moreover, applying the proposed APR
determination requirement to such loans is
consistent with the treatment of step-rate mortgages
pursuant to the requirement in the current General
QM loan definition to underwrite loans using the
maximum interest rate during the first five years
after the date on which the first regular periodic
payment will be due. See comment 43(e)(2)(iv)–
3.iii.
276 See comment 17(c)(1)–8.
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adjustments. For these ARMs,
Regulation Z requires the creditor to
disclose a composite APR based on the
initial rate for as long as it is charged
and, for the remainder of the term, on
the fully indexed rate.277 The fully
indexed rate at consummation is the
sum of the value of the index at the time
of consummation plus the margin, based
on the contract. The Dodd-Frank Act
requires a different APR calculation for
ARMs for the purpose of determining
whether ARMs are subject to certain
HOEPA requirements.278 As
implemented in § 1026.32(a)(3)(ii), the
creditor is required to determine the
APR for HOEPA coverage for
transactions in which the interest rate
may vary during the term of the loan in
accordance with an index, such as with
an ARM, by using the fully indexed rate
or the introductory rate, whichever is
greater.279
The requirements in Regulation Z for
determining the APR for disclosure
purposes and for HOEPA coverage
purposes do not account for any
potential increase or decrease in interest
rates based on changes to the underlying
index. If interest rates rise after
consummation, and therefore the value
of the index rises to a higher level, the
loan can reset to a higher interest rate
than the fully indexed rate at the time
of consummation. The result would be
a higher payment than the one implied
by the rates used in determining the
APR, and a higher effective rate spread
(and increased likelihood of
delinquency) than the spread that
would be taken into account for
determining General QM status at
consummation under the price-based
approach in the absence of a special
rule.
ARMs may present more risk for
consumers than fixed-rate mortgages,
depending on the direction and
magnitude of changes in interest rates.
In the case of a 30-year fixed-rate loan,
creditors or mortgage investors assume
both the credit risk and the interest-rate
risk (i.e., the risk that interest rates rise
above the fixed rate the consumer is
obligated to pay), and the price of the
loan, which is fully captured by the
APR, reflects both risks. In the case of
an ARM, the creditor or investor is
assuming the credit risk of the loan, but
the consumer assumes most of the
interest-rate risk, as the interest rate will
adjust along with the market. The extent
to which the consumer assumes the
interest-rate risk is established by caps
in the note on how high the interest rate
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277 See
comment 17(c)(1)–10.
TILA section 103(bb)(1)(B)(ii).
279 See comment 32(a)(3)–3.
278 See
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charged to the consumer may rise. To
compensate for the added interest-rate
risk assumed by the consumer (as
opposed to the investor), ARMs are
generally priced lower—in absolute
terms—than a 30-year fixed-rate
mortgage with comparable credit risk.280
Yet with rising interest rates, the risks
that ARMs could become unaffordable,
and therefore lead to delinquency or
default, are more pronounced. As noted
above, the requirements for determining
the APR for ARMs in Regulation Z do
not reflect this risk because they do not
take into account potential increases in
the interest rate over the term of the
loan based on changes to the underlying
index. This APR may therefore
understate the risk that the loan may
become unaffordable to the consumer if
interest rates increase.
Unaffordability risk more acute for
short-reset ARMs. While all ARMs run
the risk of increases in interest rates and
payments over time, longer-reset ARMs
(i.e., ARMs with initial fixed-rate
periods of longer than five years)
present a less acute risk of
unaffordability than short-reset ARMs.
Longer-reset ARMs permit consumers to
take advantage of lower interest rates for
more than five years and thus, akin to
fixed-rate mortgages, provide consumers
significant time to pay off or refinance,
or to otherwise adjust to anticipated
changes in payment during that
relatively long period while the interest
rate is fixed and before payments may
increase.
Short-reset ARMs can also contribute
to speculative lending because they
permit creditors to originate loans that
could be affordable in the short term,
with the expectation that property
values will increase and thereby permit
consumers to refinance before payments
may become unaffordable. Further,
creditors can minimize their credit risk
on such ARMs by, for example,
requiring lower LTV ratios, as was
common in the run-up to the 2008
financial crisis.281 Additionally,
creditors may be more willing to market
these ARMs in areas of strong housingprice appreciation, irrespective of a
consumer’s ability to absorb the
potentially higher payments after reset,
because they may expect that consumers
will have the equity to refinance if
necessary.
280 The lower absolute pricing of ARMs with
comparable credit risk is reflected in the lower
ARM APOR, which is typically 50 to 150 basis
points lower than the fixed-rate APOR.
281 Bureau analysis of NMDB data shows crisisera short-reset ARMs had lower LTVs at
consummation relative to comparably priced fixedrate loans.
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In the Dodd-Frank Act, Congress
addressed affordability concerns
specific to short-reset ARMs and their
eligibility for QM status by providing in
TILA section 129C(b)(2)(A)(v) that, to
receive QM status, ARMs must be
underwritten using the maximum
interest rate that may apply during the
first five years.282 The ATR/QM Rule
implemented this requirement in
Regulation Z at § 1026.43(e)(2)(iv). For
many short-reset ARMs, this
requirement resulted in a higher DTI
that would have to be compared to the
Rule’s 43 percent DTI limit to determine
whether the loans were eligible to
receive General QM status. Particularly
in a higher-rate environment in which
short-reset ARMs could become more
attractive, the five-year maximum
interest-rate requirement combined with
the Rule’s 43 percent DTI limit would
have likely prevented some of the
riskiest short-reset ARMs (i.e., those that
adjust sharply upward in the first five
years and cause payment shock) from
obtaining General QM status. As
discussed above, the proposed pricebased approach would remove the DTI
limit from the General QM loan
definition in § 1026.43(e)(2)(vi). As a
result, the Bureau is concerned that,
without the special rule, a price-based
approach may not adequately address
the risk that consumers taking out shortreset ARMs may not have the ability to
repay those loans but that such loans
would nonetheless be eligible for
General QM status under
§ 1026.43(e)(2).283
282 This approach for ARMs is different from the
approach in § 1026.43(c)(5) for underwriting ARMs
under the ATR requirements, which, like the APR
determination for HOEPA coverage for ARMs under
§ 1026.32(a)(3), is based on the greater of the fully
indexed rate or the initial rate.
283 As discussed, the Bureau proposes to exercise
its adjustment and revision authorities to amend
§ 1026.43(e)(2)(vi) to provide that, to determine the
APR for short-reset ARMs for purposes of General
QM status, the creditor must treat the maximum
interest rate that may apply during that five-year
period as the interest rate for the full term of the
loan. The Bureau observes that the requirement in
TILA section 129C(b)(2)(A)(v) to underwrite ARMs
for QM purposes using the maximum interest rate
that may apply during the first five years is at least
ambiguous with respect to whether it
independently obligates the creditor to determine
the APR for short-reset ARMs in the same manner
as the proposed special rule, at least where the
Bureau relies on pricing thresholds as the primary
indicator of likely repayment ability in the
proposed General QM loan definition. Furthermore,
the Bureau tentatively concludes that it would be
reasonable, in light of the proposed definition of a
General QM loan and in light of the policy concerns
already described, to construe TILA section
129C(b)(2)(A)(v) as imposing the same obligations
as the proposed special rule in § 1026.43(e)(2)(vi).
Thus, in addition to relying on its adjustment and
revision authorities to amend § 1026.43(e)(2)(vi),
the Bureau tentatively concludes that it may do so
under its general authority to interpret TILA in the
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How the price-based approach would
address affordability concerns. Bureau
analysis of historical ARM pricing and
performance indicates that the General
QM product restrictions combined with
the proposed price-based approach
would have effectively excluded
many—but not all—of the riskiest shortreset ARMs from obtaining General QM
status. As a result, the Bureau believes
an additional mechanism may be
merited to exclude from the General QM
loan definition any short-reset ARMs for
which the pricing and structure indicate
a risk of delinquency that is inconsistent
with the presumption of compliance
with ATR that comes with QM status.
Bureau analysis of NMDB data shows
that short-reset ARMs originated from
2002 through 2008 had, on average,
substantially higher early delinquency
rates (14.9 percent) than other ARMs
(10.1 percent) or fixed-rate mortgages
(5.4 percent). Many of these short-reset
ARMs were also substantially higherpriced relative to APOR and more likely
to have product features that TILA and
the Rule now prohibits for QMs, such as
interest-only payments or negative
amortization. When considering only
loans without such restricted features
and with rate spreads within 2
percentage points of APOR, short-reset
ARMs still have the highest average
early delinquency rate (5.5 percent), but
the difference relative to other ARMs
(4.3 percent) and fixed-rate mortgages
(4.2 percent) is smaller. Many ARMs in
the data during this period do not report
the time between consummation and
the first interest-rate reset, and so are
excluded from this analysis.
While the data indicates that shortreset ARMs pose a greater risk of early
delinquency than other ARMs and
fixed-rate mortgages, the Bureau
requests additional data or evidence
comparing loan performance of shortreset ARMs, other ARMs, and fixed-rate
mortgages. Moreover, as discussed
above, the proposed special rule is
designed to address the risk that, for
consumers with short-reset ARMs, a
rising-rate environment can lead to
significantly higher payments and
delinquencies in the first five years of
the loan term. Therefore, the Bureau
also requests data comparing the
performance of such loans during
periods of rising interest rates. The
Bureau recognizes that rising rates may
pose some risk of unaffordability for
longer-reset ARMs later in the loan
term. However, as discussed above, the
Bureau is proposing the special rule to
address the specific concern that shortcourse of prescribing regulations under TILA
section 105(a) to carry out the purposes of TILA.
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reset ARMs pose a higher risk vis-a-vis
other ARMs of becoming unaffordable
in the first five years, before consumers
have sufficient time to refinance or
adjust to the larger payments—a
concern Congress also identified in the
Dodd-Frank Act.
During the peak of the mid-2000s
housing boom, ARMs accounted for as
much as 52 percent of all new
originations. In contrast, the current
market share of ARMs is relatively
small. Post-crisis, the ARM share had
declined to 12 percent by December
2013 and to 2 percent by November
2019, only slightly above the historical
low of 1 percent in 2009.284 A number
of factors contributed to the overall
decline in ARM volume, particularly the
low-interest-rate environment since the
end of the financial crisis. Typically,
ARMs are more popular when
conventional interest rates are high,
since the rate (and monthly payment)
during the initial fixed period is
typically lower than the rate of a
comparable conventional fixed-rate
mortgage.
Consistent with TILA section
129C(b)(2)(A), the January 2013 Final
Rule prohibited ARMs with higher-risk
features such as interest-only payments
or negative amortization from receiving
General QM status. According to the
Assessment Report, short-reset ARMs
comprised 17 percent of ARMs in 2012,
prior to the January 2013 Final Rule,
and fell to 12.3 percent in 2015, after the
effective date of the Rule.285 The
Assessment Report also found that
short-reset ARMs originated after the
effective date of the Rule were restricted
to highly creditworthy borrowers.286
This combination of factors postcrisis—the sharp drop in ARM
originations and the restriction of such
originations to highly creditworthy
borrowers, as well as the prevalence of
low interest rates—likely has muted the
overall risks of short-reset ARMs. For
example, the Assessment Report found
that conventional, non-GSE short-reset
ARMs originated after the effective date
of the Rule had early delinquency rates
of only 0.2 percent.287 Thus, these
recent originations may not accurately
reflect the potential unaffordability of
short-reset ARMs under different market
284 Laurie Goodman et. al., Urban Inst., Housing
Finance at a Glance (Feb. 2020), at 9, https://
www.urban.org/research/publication/housingfinance-glance-monthly-chartbook-february-2020/
view/full_report.
285 Assessment Report, supra note 58, at 94 (fig.
25).
286 Id. at 93–95.
287 Id. at 95 (fig. 26).
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conditions than those that currently
prevail.
Proposed special rule for APR
determination for short-reset ARMs.288
Given the potential that rising interest
rates could cause short-reset ARMs to
become unaffordable for consumers
following consummation and the fact
that the price-based approach may not
account for some of those risks because
of how APRs are determined for ARMs,
the Bureau is proposing a special rule to
determine the APR for short-reset ARMs
for purposes of defining General QM
under § 1026.43(e)(2). As noted above,
in defining QM in TILA, Congress
adopted a special requirement to
address affordability concerns for shortreset ARMs. Specifically, the statute
provides that, for an ARM to be a QM,
the underwriting must be based on the
maximum interest rate permitted under
the terms of the loan during the first five
years. With the 43 percent DTI limit in
the current rule, implementing the fiveyear underwriting requirement is
straightforward: The rule requires a
creditor to calculate DTI using the
mortgage payment that results from the
maximum possible interest rate that
could apply during the first five
years.289 This ensures that the creditor
calculates the DTI using the highest
interest rate that the consumer may
experience in the first five years, and
the loan is not eligible for QM status
under § 1026.43(e)(2) if the DTI
calculated using that interest rate
exceeds 43 percent. The Bureau is
concerned that using the fully indexed
rate to determine the APR for purposes
of the rate spread thresholds in
proposed § 1026.43(e)(2)(vi) would not
provide a sufficiently meaningful
safeguard against the elevated
likelihood of delinquency for short-reset
ARMs. For that reason, the Bureau is
proposing the special rule for
determining the APR for such loans.
The Bureau believes the statutory
five-year underwriting requirement
provides a basis for the special rule for
determining the APR for short-reset
ARMs for purposes of General QM ratespread thresholds under § 1026.43(e)(2).
Specifically, the Bureau is proposing
that the creditor must determine the
APR by treating the maximum interest
rate that may apply during the first five
years, as described in proposed
§ 1026.43(e)(2)(vi), as the interest rate
for the full term of the loan. That APR
determination would then be compared
288 As noted above, the proposed special rule
would also apply to step-rate mortgages in which
the interest rate changes in the first five years.
289 12 CFR 1026.43(e)(2)(iv).
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to the APOR 290 to determine General
QM status. This approach would
address in a targeted manner the
primary concern about short-reset
ARMs—payment shock—by accounting
for the risk of delinquency and default
associated with payment increases
under these loans. And it would do so
in a manner that is consistent with the
five-year framework embedded in the
statutory provision for such ARMs and
implemented in the current rule.
In sum, the proposed special rule is
consistent with both the statutory
mandate for short-reset ARMs and the
proposed price-based approach. As
discussed above in part V, the rate
spread of APR over APOR is strongly
correlated with early delinquency rates.
As a result, such rate spreads may
generally serve as an effective proxy for
a consumer’s ability to repay. However,
the structure and pricing of ARMs can
result in early interest rate increases that
are not fully accounted for in Regulation
Z provisions for determining the APR
for ARMs. Such increases would
diminish the effectiveness of the rate
spread as a proxy, and lead to
heightened risk of early delinquency for
short-reset ARMs relative to other loans
with comparable APRs over APOR rate
spreads. The proposed special rule, by
requiring creditors to more fully
incorporate this interest-rate risk in
determining the APR for short-reset
ARMs, would help ensure that the
resulting pricing would account for that
risk for such loans.
The proposed special rule would
require that the maximum interest rate
in the first five years be treated as the
interest rate for the full term of the loan
to determine the APR. The Bureau is
concerned that a composite APR
determination based on the maximum
interest rate in the first five years and
the fully indexed rate for the remaining
loan term could understate the APR for
short-reset ARMs by failing to
sufficiently account for the risk that
consumers with such loans could face
payment shock early in the loan term.
Accordingly, to account for that risk,
and due to concerns about whether it
would be appropriate to presume ATR
for short-reset ARMs without such a
safeguard, the Bureau is proposing that
the APR for short-reset ARMs be based
290 This refers to the standard APOR for ARMs.
The proposed requirement would modify the
determination for the APR of ARMs but would not
affect the determination of the APOR. The Bureau
notes that the APOR used for step-rate mortgages
would be the ARM APOR because, as with ARMs,
the interest rate in step-rate mortgages adjusts and
is not fixed. Thus, the APOR for fixed-rate
mortgages would be inapt.
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on the maximum interest rate during the
first five years.
The Bureau considered several
alternatives to the proposed special rule
for certain loans for which the interest
rate may or will change within the first
five years after the date on which the
first regular periodic payment will due.
In response to the ANPR, several
consumer advocates submitted
comments suggesting prohibiting
altogether short-reset ARMs from
consideration as General QMs. These
commenters pointed to the high default
and foreclosure rates of such ARMs, the
complex nature of the product, and
consumers’ insufficient comprehension
of the product as justification to deny
General QM status for ARMs with a
fixed-rate period of less than five years.
The Bureau believes the risks associated
with short-reset ARMs can be effectively
managed without prohibiting them from
receiving General QM status, given that
the Dodd-Frank Act explicitly permits
short-reset ARMs to be considered as
General QMs and includes a specific
provision for addressing the potential
for payment shock from such loans.
One of the above-referenced
commenters alternatively recommended
the Bureau impose specific limits on
annual adjustments for short-reset
ARMs. The Bureau considered this and
similar alternatives, including applying
a different rate spread over APOR for
short-reset ARMs. The Bureau
anticipates that the proposed approach
would address in a more streamlined
and targeted manner the core problem,
i.e., that short-reset ARMs could reset to
significantly higher interest rates shortly
after consummation resulting in a risk of
default from unaffordable payments not
adequately reflected under the standard
determination of APR for ARMs.
Further, the Bureau believes that
including different rate spreads or
similar schemes for short-reset ARMs
and additional subtypes of loans would
impose unnecessary operational and
compliance complexity.
Proposed comment 43(e)(2)(vi)–4.i
explains that provisions in subpart C,
including the existing commentary to
§ 1026.17(c)(1), address the
determination of the APR disclosures
for closed-end credit transactions and
that provisions in § 1026.32(a)(3)
address how to determine the APR to
determine coverage under
§ 1026.32(a)(1)(i). It further explains that
proposed § 1026.43(e)(2)(vi) requires, for
the purposes of that paragraph, a
different determination of the APR for a
QM under proposed § 1026.43(e)(2) for
which the interest rate may or will
change within the first five years after
the date on which the first regular
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periodic payment will be due. In
addition, proposed comment
43(e)(2)(vi)–4.i explains that an
identical special rule for determining
the APR for such a loan also applies for
purposes of proposed § 1026.43(b)(4).
Proposed comment 43(e)(2)(vi)–4.ii
explains the application of the special
rule in proposed § 1026.43(e)(2)(vi) for
determining the APR for a loan for
which the interest rate may or will
change within the first five years after
the date on which the first regular
periodic payment will be due.
Specifically, it explains that the special
rule applies to ARMs that have a fixedrate period of five years or less and to
step-rate mortgages for which the
interest rate changes within that fiveyear period.
Proposed comment 43(e)(2)(vi)–4.iii
explains that, to determine the APR for
purposes of proposed 43(e)(2)(vi), a
creditor must treat the maximum
interest rate that could apply at any time
during the five-year period after the date
on which the first regular periodic
payment will be due as the interest rate
for the full term of the loan, regardless
of whether the maximum interest rate is
reached at the first or subsequent
adjustment during the five-year period.
Further, the proposed comment crossreferences existing comments
43(e)(2)(iv)–3 and –4 for additional
instruction on how to determine the
maximum interest rate during the first
five years after the date on which the
first regular periodic payment will be
due.
Proposed comment 43(e)(2)(vi)–4.iv
explains how to use the maximum
interest rate to determine the APR for
purposes of proposed
§ 1026.43(e)(2)(vi). Specifically, the
proposed comment explains that the
creditor must determine the APR by
treating the maximum interest rate
described in proposed
§ 1026.43(e)(2)(vi) as the interest rate for
the full term of the loan. It further
provides an example of how to
determine the APR by treating the
maximum interest rate as the interest
rate for the full term of the loan.
As discussed above in part IV, TILA
section 105(a), directs the Bureau to
prescribe regulations to carry out the
purposes of TILA, and provides that
such regulations may contain additional
requirements, classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for all or any class of
transactions that the Bureau judges are
necessary or proper to effectuate the
purposes of TILA, to prevent
circumvention or evasion thereof, or to
facilitate compliance therewith. In
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particular, a purpose of TILA section
129C, as amended by the Dodd-Frank
Act, to assure that consumers are offered
and receive residential mortgage loans
on terms that reasonably reflect their
ability to repay the loans.
As also discussed above in part IV,
TILA section 129C(b)(3)(B)(i) authorizes
the Bureau to prescribe regulations that
revise, add to, or subtract from the
criteria that define a QM upon a finding
that such regulations are necessary or
proper to ensure that responsible,
affordable mortgage credit remains
available to consumers in a manner
consistent with the purposes of section
129C, necessary and appropriate to
effectuate the purposes of section 129C
and section 129B, to prevent
circumvention or evasion thereof, or to
facilitate compliance with such section.
The Bureau is proposing the special
rule in § 1026.43(e)(2)(vi) regarding the
APR determination of certain loans for
which the interest rate may or will
change pursuant to its authority under
TILA section 105(a) to make such
adjustments and exceptions as are
necessary and proper to effectuate the
purposes of TILA, including that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans. The Bureau believes that
these proposed provisions may ensure
that General QM status would not be
accorded to short-reset ARMs and
certain other loans that pose a
heightened risk of becoming
unaffordable relatively soon after
consummation. The Bureau is also
proposing these provisions pursuant to
its authority under TILA section
129C(b)(3)(B)(i) to revise and add to the
criteria that define a QM. The Bureau
believes that the proposed APR
determination provisions in
§ 1026.43(e)(2)(vi) may ensure that
responsible, affordable mortgage credit
remains available to consumers in a
manner consistent with the purpose of
TILA section 129C, referenced above, as
well as effectuate that purpose.
The Bureau requests comment on all
aspects of the proposed special rule in
proposed § 1026.43(e)(2)(vi). In
particular, the Bureau requests data
regarding short-reset ARMs and those
step-rate mortgages that would be
subject to the proposed special rule,
including default and delinquency rates
and the relationship of those rates to
price. The Bureau also requests
comment on alternative approaches for
such loans, including the ones
discussed above, such as imposing
specific limits on annual rate
adjustments for short-reset ARMs,
applying a different rate spread, and
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excluding such loans from General QM
eligibility altogether.
43(e)(4)
TILA section 129C(b)(3)(B)(ii) directs
HUD, VA, USDA, and the Rural Housing
Service (RHS) to prescribe rules
defining the types of loans they insure,
guarantee, or administer, as the case
may be, that are QMs. Pending the other
agencies’ implementation of this
provision, the Bureau included in the
ATR/QM Rule a temporary category of
QM loans in the special rules in
§ 1026.43(e)(4)(ii)(B) through (E)
consisting of mortgages eligible to be
insured or guaranteed (as applicable) by
HUD, VA, USDA, and RHS. The Bureau
also created the Temporary GSE QM
loan definition, in § 1026.43(e)(4)(ii)(A).
Section 1026.43(e)(4)(i) states that,
notwithstanding § 1026.43(e)(2), a QM is
a covered transaction that satisfies the
requirements of § 1026.43(e)(2)(i)
through (iii)—the General QM loanfeature prohibitions and points-and-fees
limits—as well as one or more of the
criteria in § 1026.43(e)(4)(ii). Section
1026.43(e)(4)(ii) states that a QM under
§ 1026.43(e)(4) must be a loan that is
eligible under enumerated ‘‘special
rules’’ to be (A) purchased or guaranteed
by the GSEs while under the
conservatorship of the FHFA (the
Temporary GSE QM loan definition), (B)
insured by HUD under the National
Housing Act, (C) guaranteed by VA, (D)
guaranteed by USDA pursuant to 42
U.S.C. 1472(h), or (E) insured by RHS.
Section 1026.43(e)(4)(iii)(A) states that
§ 1026.43(e)(4)(ii)(B) through (E) shall
expire on the effective date of a rule
issued by each respective agency
pursuant to its authority under TILA
section 129C(b)(3)(ii) to define a QM.
Section 1026.43(e)(4)(iii)(B) states that,
unless otherwise expired under
§ 1026.43(e)(4)(iii)(A), the special rules
in § 1026.43(e)(4) are available only for
covered transactions consummated on
or before January 10, 2021.
The Bureau proposes to amend
§ 1026.43(e)(4) to state that,
notwithstanding § 1026.43(e)(2), a QM is
a covered transaction that is defined as
a QM by HUD under 24 CFR 201.7 or
24 CFR 203.19, VA under 38 CFR
36.4300 or 38 CFR 36.4500, or USDA
under 7 CFR 3555.109. There are two
reasons for this proposed amendment.
First, if the Bureau issues a final rule
in connection with this present
proposal, the Bureau anticipates that the
Temporary GSE QM loan definition
described in § 1026.43(e)(4)(ii)(A) may
expire upon the effective date of such a
final rule. This is because, in a separate
proposed rule released simultaneously
with this proposal, the Bureau proposes
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to revise § 1026.43(e)(4)(iii)(B) to state
that, unless otherwise expired under
§ 1026.43(e)(4)(iii)(A), the special rules
in § 1026.43(e)(4) are available only for
covered transactions consummated on
or before the effective date of a final rule
issued by the Bureau amending the
General QM loan definition. The Bureau
may issue a final rule concerning its
proposal to extend the sunset date in
§ 1026.43(e)(4)(iii)(B) before it issues a
final rule concerning this present
proposal (which would amend the
General QM loan definition). Thus, if
the Bureau issues a final rule in
connection with this present proposal,
such a final rule would remove the
Temporary GSE QM loan definition
from § 1026.43(e)(4)(ii)(A).
Second, after promulgation of the
January 2013 Final Rule, each of the
agencies described in
§ 1026.43(e)(4)(ii)(B) through (E)
adopted separate definitions of qualified
mortgages.291 Under current
§ 1026.43(e)(4)(iii)(A), the special rules
in § 1026.43(e)(4)(ii)(B) through (E) are
already superseded by the actions of
HUD, VA, and USDA. The Bureau
proposes to amend § 1026.43(e)(4) to
provide cross-references to each of these
other agencies’ definitions so that
creditors and practitioners have a single
point of reference for all QM definitions.
The Bureau also proposes to amend
comment 43(e)(4)–1 to reflect the crossreferences to the QM definitions of other
agencies and to clarify that a covered
transaction that meets another agency’s
definition is a QM for purposes of
§ 1026.43(e). Comment 43(e)(4)–2 would
be amended to clarify that covered
transactions that met the requirements
of § 1026.43(e)(2)(i) through (iii), were
eligible for purchase or guarantee by
Fannie Mae or Freddie Mac, and were
consummated prior to the effective date
of any final rule promulgated as a result
of the proposal would still be
considered a QM for purposes of
§ 1026.43(e) after the adoption of such
potential final rule. Comments 43(e)(4)–
3, –4, and –5 would be amended to
indicate that such comments are
reserved for future use. The Bureau
requests comment on the proposed
amendments to § 1026.43(e)(4) and
related commentary.
Conforming Changes
As discussed above, the Bureau is
proposing revisions to § 1026.43(e)(2)(v)
and (e)(2)(vi) that would, among other
things, remove references to appendix Q
and remove the DTI ratio limit in
291 78 FR 75215 (Dec. 11, 2013) (HUD); 79 FR
26620 (May 9, 2014) and 83 FR 50506 (Oct. 9, 2018)
(VA); and 81 FR 26461 (May 3, 2016) (USDA).
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§ 1026.43(e)(2)(vi). The Bureau is also
proposing to remove appendix Q.
Accordingly, the Bureau is proposing
nonsubstantive conforming changes in
certain provisions to reflect the
proposed changes to § 1026.43(e)(2)(v)
and (e)(2)(vi) and the proposed removal
of appendix Q. Specifically, the Bureau
proposes to update comment 43(c)(7)–1
by removing the reference to the DTI
limit in § 1026.43(e). The Bureau also
proposes conforming changes to
provisions related to small creditor QMs
in § 1026.43(e)(5)(i) and to balloonpayment QMs in § 1026.43(f)(1). Both
§ 1026.43(e)(5) and (f)(1) provide that as
part of the respective QM definitions,
loans must comply with the
requirements to consider and verify
debts and income in existing
§ 1026.43(e)(2)(v). As discussed above,
the Bureau is proposing to reorganize
and revise § 1026.43(e)(2)(v) in order to
provide that creditors must consider
DTI or residual income and to clarify
the requirements for creditors to
consider and verify income, debt and
other information. The proposed
conforming changes to § 1026.43(e)(5)
and (f)(1) would generally insert the
substantive requirements of existing
§ 1026.43(e)(2)(v) into § 1026.43(e)(5)(i)
and (f)(1), respectively, and would
provide that loans under § 1026.43(e)(5)
and § 1026.43(f) do not have to comply
with proposed § 1026.43(e)(2)(v) or
(e)(2)(vi). The proposed conforming
changes would not insert the
requirement that lenders consider and
verify income, debt, and other
information in accordance with
appendix Q because, as described
elsewhere in this proposal, the Bureau
is proposing to remove appendix Q from
Regulation Z. The Bureau is also
proposing conforming changes to the
related commentary.
Appendix Q to Part 1026—Standards for
Determining Monthly Debt and Income
Appendix Q to part 1026 contains
standards for calculating and verifying
debt and income for purposes of
determining whether a mortgage
satisfies the 43 percent DTI limit for
General QM loans. As explained in the
section-by-section analysis of
§ 1026.43(e)(2)(v)(B) above, the Bureau
proposes to remove appendix Q entirely
in light of concerns from creditors and
investors that its perceived rigidity,
ambiguity, and static nature result in
standards that are both confusing and
outdated. As noted above, the Bureau
seeks comment on its proposal to
remove appendix Q entirely and not to
retain it as an option for creditors to
verify the consumer’s income, assets,
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debt obligations, alimony, and child
support.
VII. Dodd-Frank Act Section 1022(b)
Analysis
A. Overview
As discussed above, this proposal
would amend the General QM loan
definition to, among other things,
remove the specific DTI limit and add
a pricing threshold. In developing this
proposal, the Bureau has considered the
potential benefits, costs, and impacts as
required by section 1022(b)(2)(A) of the
Dodd-Frank Act. Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act
requires the Bureau to consider the
potential benefits and costs of a
regulation to consumers and covered
persons, including the potential
reduction of access by consumers to
consumer financial products or services,
the impact on depository institutions
and credit unions with $10 billion or
less in total assets as described in
section 1026 of the Dodd-Frank Act, and
the impact on consumers in rural areas.
The Bureau consulted with appropriate
prudential regulators and other Federal
agencies regarding the consistency of
the proposed rule with prudential,
market, or systemic objectives
administered by such agencies as
required by section 1022(b)(2)(B) of the
Dodd-Frank Act. The Bureau requests
comment on the preliminary analysis
presented below as well as submissions
of additional data that could inform the
Bureau’s analysis of the benefits, costs,
and impacts.
1. Data and Evidence
The discussion in these impact
analyses relies on data from a range of
sources. These include data collected or
developed by the Bureau, including
HMDA 292 and NMDB 293 data, as well
292 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/.
293 The NMDB, jointly developed by the FHFA
and the Bureau, provides de-identified loan
characteristics and performance information for a
five percent sample of all mortgage originations
from 1998 to the present, supplemented by deidentified 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
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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 DoddFrank Act. The Assessment Report
provides quantitative and qualitative
information on questions relevant to the
proposed rule, including the extent to
which DTI ratios are probative of a
consumer’s ability to repay, the effect of
rebuttable presumption status relative to
safe harbor status on access to credit,
and the effect of QM status relative to
non-QM status on access to credit.
Consultations with other regulatory
agencies, industry, and research
organizations inform the Bureau’s
impact analyses.
The data the Bureau relied upon
provide detailed information on the
number, characteristics, pricing, and
performance of mortgage loans
originated in recent years. However, it
would be useful to supplement these
data with more information relevant to
pricing and APR calculations
(particularly PMI costs) for originations
before 2018. PMI costs are an important
component of APRs, particularly for
loans with smaller down payments, and
thus should be included or estimated in
calculations of rate spreads relative to
APOR. The Bureau seeks additional
information or data which could inform
quantitative estimates of PMI costs or
APRs for these loans.
The data also do not provide
information on creditor costs. As a
result, analyses of any impacts of the
proposal on creditor costs, particularly
realized costs of complying with
underwriting criteria or potential costs
from legal liability, are based on more
qualitative information. Similarly,
estimates of any changes in burden on
consumers resulting from increased or
decreased verification requirements are
based on qualitative information.
The Bureau seeks additional
information or data which could inform
quantitative estimates of the number of
borrowers whose documentation cannot
satisfy appendix Q, or the costs to
borrowers or covered persons of
complying with appendix Q verification
requirements (or the potential costs of
complying with appendix Q for
Temporary GSE QM loans) or the
proposed verification requirements. The
Bureau also seeks comment or
additional information which could
inform quantitative estimates of the
availability, underwriting, and pricing
of non-QM alternatives to loans made
are attributable to differences in coverage and data
construction methodology.
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under the Temporary GSE QM loan
definition.
2. Description of the Baseline
The Bureau considers the benefits,
costs, and impacts of the proposal
against the baseline in which the Bureau
takes no action and the Temporary GSE
QM loan definition expires on January
10, 2021, or when the GSEs exit
conservatorship, whichever occurs first.
Under the proposal, the amendments to
the General QM loan definition would
take effect either at the time or after the
Temporary GSE QM loan definition
expires, depending on whether the GSEs
remain in conservatorship on the
effective date of a final rule issued by
the Bureau amending the General QM
loan definition. As a result, the
proposal’s direct market impacts are
considered relative to a baseline in
which the Temporary GSE QM has
expired and no changes have been made
to the General QM loan definition.
Unless described otherwise, estimated
loan counts under the baseline,
proposal, and alternatives are annual
estimates.
Under the baseline, conventional
loans could receive QM status under the
Bureau’s rules only by underwriting
according to the General QM
requirements, Small Creditor QM
requirements, Balloon Payment QM
requirements, or the expanded portfolio
QM amendments created by the 2018
Economic Growth, Regulatory Relief,
and Consumer Protection Act. The
General QM loan definition, which
would be the only type of QM available
to larger creditors for conventional
loans, requires that consumers’ DTI ratio
not exceed 43 percent and requires
creditors to determine debt and income
in accordance with the standards in
appendix Q.
The Bureau anticipates that there are
two main types of conventional loans
that would be affected by the expiration
of the Temporary GSE QM loan
definition: High-DTI GSE loans (those
with DTI ratios above 43 percent) and
GSE-eligible loans without appendix Qrequired documentation. These loans
are currently originated as QM loans
due to the Temporary GSE QM loan
definition but may not be originated as
General QM loans, or may not be
originated at all, without the proposed
amendments to the General QM loan
definition. This section 1022 analysis
refers to these loans as potentially
displaced loans.
High-DTI GSE Loans. The ANPR
provided an estimate of the number of
loans potentially affected by the
expiration of the Temporary GSE QM
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loan definition.294 In providing the
estimate, the ANPR focused on loans
that fall within the Temporary GSE QM
loan definition but not the General QM
loan definition because they have a DTI
ratio above 43 percent. This proposal
refers to these loans as High-DTI GSE
loans. Based on NMDB data, the Bureau
estimated that there were approximately
6.01 million closed-end first-lien
residential mortgage originations in the
United States in 2018.295 Based on
supplemental data provided by the
FHFA, the Bureau estimated that the
GSEs purchased or guaranteed 52
percent—roughly 3.12 million—of those
loans.296 Of those 3.12 million loans,
the Bureau estimated that 31 percent—
approximately 957,000 loans—had DTI
ratios greater than 43 percent.297 Thus,
the Bureau estimated that, as a result of
the General QM loan definition’s 43
percent DTI limit, approximately
957,000 loans—16 percent of all closedend first-lien residential mortgage
originations in 2018—were High-DTI
GSE loans.298 This estimate does not
include Temporary GSE QM loans that
were eligible for purchase by the GSEs
but were not sold to the GSEs.
Loans Without Appendix Q-Required
Documentation That Are Otherwise
GSE-Eligible. In addition to High-DTI
GSE loans, the Bureau noted that an
additional, smaller number of
Temporary GSE QM loans with DTI
ratios of 43 percent or less, when
calculated using GSE underwriting
guides, may not fall within the General
QM loan definition because their
method of verifying income or debt is
incompatible with appendix Q.299 These
loans would also likely be affected
when the Temporary GSE QM loan
definition expires. The Bureau
understands, from extensive public
feedback and its own experience, that
appendix Q does not specifically
address whether and how to verify
certain forms of income. The Bureau
understands these concerns are
particularly acute for self-employed
consumers, consumers with part-time
employment, and consumers with
294 84
FR 37155, 37158–59 (July 31, 2019).
FR at 37158–59.
296 Id. at 37159.
297 Id. The Bureau estimates that 616,000 of these
loans were for home purchases, and 341,000 were
refinance loans. In addition, the Bureau estimates
that the share of these loans with DTI ratios over
45 percent has varied over time due to changes in
market conditions and GSE underwriting standards,
rising from 47 percent in 2016 to 56 percent in
2017, and further to 69 percent in 2018.
298 Id. at 37159.
299 Id. at 37159 n.58. Where these types of loans
have DTI ratios above 43 percent, they would be
captured in the estimate above relating to High-DTI
GSE loans.
295 84
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irregular or unusual income streams.300
As a result, these consumers’ access to
credit may be affected if the Temporary
GSE QM loan definition were to expire
without amendments to the General QM
loan definition.
The Bureau’s analysis of the market
under the baseline focuses on High-DTI
GSE loans because the Bureau estimates
that most potentially displaced loans are
High-DTI GSE loans. The Bureau also
lacks the loan-level documentation and
underwriting data necessary to estimate
with precision the number of potentially
displaced loans that do not fall within
the other General QM loan requirements
and are not High-DTI GSE loans.
However, the Assessment did not find
evidence of substantial numbers of
loans in the non-GSE-eligible jumbo
market being displaced when appendix
Q verification requirements became
effective in 2014.301 Further, the
Assessment Report found evidence of
only a limited reduction in the approval
rate of self-employed applicants for nonGSE eligible mortgages.302 Based on this
evidence, along with qualitative
comparisons of GSE and appendix Q
verification requirements and available
data on the prevalence of borrowers
with non-traditional or difficult-todocument income (e.g., self-employed
borrowers, retired borrowers, those with
irregular income streams), the Bureau
estimates this second category of
potentially displaced loans is
considerably less numerous than the
category of High-DTI GSE loans.
Additional Effects on Loans Not
Displaced. While the most significant
market effects under the baseline are
displaced loans, loans that continue to
be originated as QM loans after the
expiration of the Temporary GSE QM
loan definition would also be affected.
After the expiration date, all loans with
300 For example, in qualitative responses to the
Bureau’s Lender Survey conducted as part of the
Assessment, underwriting for self-employed
borrowers was one of the most frequently reported
sources of difficulty in originating mortgages using
appendix Q. These concerns were also raised in
comments submitted in response to the Assessment
RFI, noting that appendix Q is ambiguous with
respect to how to treat income for consumers who
are self-employed, have irregular income, or want
to use asset depletion as income. See Assessment
Report, supra note 58, at 200.
301 Id. at 107 (‘‘For context, total jumbo purchase
originations increased from an estimated 108,700 to
130,200 between 2013 and 2014, based on
nationally representative NMDB data.’’).
302 Id. at 118 (‘‘The Application Data indicates
that, notwithstanding concerns that have been
expressed about the challenge of documenting and
verifying income for self-employed borrowers under
the General QM standard and the documentation
requirements contained in appendix Q to the Rule,
approval rates for non-High DTI, non-GSE eligible
self-employed borrowers have decreased only
slightly, by two percentage points . . . .’’).
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DTI ratios at or below 43 percent which
are or would have been purchased and
guaranteed as GSE loans under the
Temporary GSE QM loan definition—
approximately 2.16 million loans in
2018—and that continue to be
originated as General QM loans after the
provision expires would be required to
verify income and debts according to
appendix Q, rather than only according
to GSE guidelines. Given the concerns
raised about appendix Q’s ambiguity
and lack of flexibility, this would likely
entail both increased documentation
burden for some consumers as well as
increased costs or time-to-origination for
creditors on some loans.303
B. Potential Benefits and Costs to
Covered Persons and Consumers
1. Benefits to Consumers
The primary benefit to consumers of
the proposal is increased access to
credit, largely through the expanded
availability of High-DTI conventional
QM loans. Given the large number of
consumers who obtain High-DTI GSE
loans rather than available alternatives,
including loans from the private nonQM market and FHA loans, such HighDTI conventional QM loans may be
preferred due to their pricing,
underwriting requirements, or other
features. Based on HMDA data, the
Bureau estimates that 943,000 High-DTI
conventional loans in 2018 would fall
outside the QM definitions under the
baseline, but fall within the proposal’s
amended General QM loan
definition.304 In addition, some
consumers who would have been
limited in the amount they could
borrow due to the DTI limit under the
baseline would likely be able to obtain
larger mortgages at higher DTI levels.
Under the baseline, a sizeable share of
potentially displaced High-DTI GSE
loans may instead be originated as FHA
loans. Thus, under the proposal, any
price advantage of GSE or other
conventional QM loans over FHA loans
would be a realized benefit to
consumers. Based on the Bureau’s
analysis of 2018 HMDA data, FHA loans
comparable to the loans received by
High-DTI GSE borrowers, based on loan
purpose, credit score, and combined
LTV ratio, on average have $3,000 to
$5,000 higher upfront total loan costs at
origination. APRs provide an
alternative, annualized measure of costs
303 See part V.B. for additional discussion of
concerns raised about appendix Q.
304 This estimate includes only HMDA loans
which have a reported DTI and rate spread over
APOR, and thus may underestimate the true
number of loans gaining QM status under the
proposal.
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over the life of a loan. FHA borrowers
typically pay different APRs, which can
be higher or lower than APRs for GSE
loans depending on a borrower’s credit
score and LTV. Borrowers with credit
scores at or above 720 pay an APR 30
to 60 basis points higher than borrowers
of comparable GSE loans, leading to
higher monthly payments over the life
of the loan. However, FHA borrowers
with credit scores below 680 and
combined LTVs exceeding 85 percent
pay an APR 20 to 40 basis points lower
than borrowers of comparable GSE
loans, leading to lower monthly
payments over the life of the loan.305
For a loan size of $250,000, these APR
differences amount to $2,800 to $5,600
in additional total monthly payments
over the first five years of mortgage
payments for borrowers with credit
scores above 720, and $1,900 to $3,800
in reduced total monthly payments over
five years for borrowers with credit
scores below 680 and LTVs exceeding
85 percent.306 Thus, all FHA borrowers
are likely to pay higher costs at
origination, while some pay higher
monthly mortgage payments, and others
pay lower monthly mortgage payments.
Assuming for comparison that all
943,000 additional loans falling within
the amended General QM loan
definition would be made as FHA loans
in the absence of the proposal, the
average of the upfront pricing estimates
implies total savings for consumers of
roughly $4 billion per year on upfront
costs.307 The total savings or costs over
the life of the loan implied by APR
differences would vary substantially
across borrowers depending on credit
scores, LTVs, and length of time holding
the mortgage. While this comparison
assumed all potentially displaced loans
would be made as FHA loans, higher
costs (either upfront or in monthly
payments) are likely to prevent some
borrowers from obtaining loans at all.
In the absence of the proposed
amendment to the regulation, some of
these potentially displaced consumers,
305 The Bureau expects consumers could continue
to obtain FHA loans where such loans were cheaper
or preferred for other reasons.
306 Based on NMDB data, the Bureau estimates
that the average loan amount among High-DTI GSE
borrowers in 2018 was $250,000. While the time to
repayment for mortgages varies with economic
conditions, the Bureau estimates that half of
mortgages are typically closed or paid off five to
seven years into repayment. Payment comparisons
based on typical 2018 HMDA APRs for GSE loans,
5 percent for borrowers with credit scores over 720,
and 6 percent for borrowers with credit scores
below 680 and LTVs exceeding 85.
307 This approximation assumes $4,000 in savings
from total loan costs for all 943,000 consumers.
Actual expected savings would vary substantially
based on loan and credit characteristics, consumer
choices, and market conditions.
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particularly those with higher credit
scores and the resources to make larger
down payments, likely would be able to
obtain credit in the non-GSE private
market at a cost comparable to or
slightly higher than the costs for GSE
loans, but below the cost of an FHA
loan. As a result, the above cost
comparisons between GSE and FHA
loans provide an estimated upper bound
on pricing benefits to consumers of the
proposal. However, under the baseline,
some potentially displaced consumers
may not obtain loans, and thus would
experience benefits of credit access
under the proposal. As discussed above,
the Assessment Report found that the
January 2013 Final Rule eliminated
between 63 and 70 percent of high-DTI
home purchase loans that were not
Temporary GSE QM loans.308 The
Bureau requests information or data
which would inform quantitative
estimates of the number of consumers
who may not obtain loans and the costs
to such consumers.
The proposal would also benefit those
consumers with incomes difficult to
verify using appendix Q to obtain
General QM status, as the proposed
General QM amendments would no
longer require the use of appendix Q for
verification of income. Under the
proposal—as under the current rule—
creditors would be required to verify
income and assets in accordance with
§ 1026.43(c)(4) and debt obligations,
alimony, and child support in
accordance with § 1026.43(c)(3). The
proposal would also state that a creditor
complies with the General QM
requirement to verify income, assets,
debt obligations, alimony, and child
support where it complies with
verification requirements in standards
the Bureau specifies. The greater
flexibility of verification standards
allowed under the proposal is likely to
reduce effort and costs for these
consumers, and in the most difficult
cases in which consumers’
documentation cannot satisfy appendix
Q, the proposal may allow consumers to
obtain General QM loans rather than
potential FHA or non-QM alternatives.
These consumers—likely including selfemployed borrowers and those with
non-traditional forms of income—would
likely benefit from cost savings under
the proposal, similar to those for HighDTI consumers discussed above.
Finally, as noted below under ‘‘Costs
to consumers,’’ the Bureau estimates
that 28,000 low-DTI conventional loans
which are QM under the baseline would
fall outside the amended QM definition
308 See Assessment Report supra note 58, at 10–
11, 117, 131–47.
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under the proposal, due to exceeding
the pricing thresholds in proposed
§ 1026.43(e)(2)(vi). If consumers of such
loans are able to obtain non-QM loans
with the amended General QM loan
definition in place, they would gain the
benefit of the ability-to-repay causes of
action and defenses against foreclosure.
However, some of these consumers may
instead obtain FHA loans with QM
status.
2. Benefits to Covered Persons
The proposal’s primary benefit to
covered persons, specifically mortgage
creditors, is the expanded profits from
originating High-DTI conventional QM
loans. Under the baseline, creditors
would be unable to originate such loans
under the Temporary GSE QM loan
definition and would instead have to
originate loans with comparable DTI
ratios as FHA, Small Creditor QM, or
non-QM loans, or originate at lower DTI
ratios as conventional General QM
loans. Creditors’ current preference for
originating large numbers of High-DTI
Temporary GSE QMs likely reflects
advantages in a combination of costs or
guarantee fees (particularly relative to
FHA loans), liquidity (particularly
relative to Small Creditor QM), or
litigation and credit risk (particularly
relative to non-QM). Moreover, QM
loans—including Temporary GSE
QMs—are exempt from the Dodd-Frank
Act risk retention requirement whereby
creditors that securitize mortgage loans
are required to retain at least five
percent of the credit risk of the security,
which adds significant cost. As a result,
the proposal conveys benefits to
mortgage creditors originating High-DTI
conventional QMs on each of these
dimensions.
In addition, for those lower-DTI GSE
loans which could satisfy General QM
requirements, creditors may realize cost
savings from underwriting loans using
the more flexible verification standards
allowed under the proposal compared
with using appendix Q. Under the
proposal, creditors would be required to
consider DTI or residual income in
addition to income and debt but would
not need to comply with the appendix
Q standards required for General QM
loans under the baseline. For
conventional consumers unable to
provide documentation compatible with
appendix Q, the proposal may allow
such loans to continue receiving QM
status, providing comparable benefits to
creditors as described for High-DTI GSE
loans above.
Finally, those creditors whose
business models rely most heavily on
originating High-DTI GSE loans would
likely see a competitive benefit from the
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41769
continued ability to originate such loans
as General QMs. This is effectively a
transfer in market share to these
creditors from those who primarily
originate FHA or private non-QM loans,
who likely would have gained market
share under the baseline.
3. Costs to Consumers
As discussed above, relative to the
baseline, the Bureau estimates that
943,000 additional High-DTI loans
could be originated as General QM loans
under the proposal. Some of these loans
would have been non-QM loans (if
originated) under the baseline. As a
result, the proposal is likely to increase
the number of consumers who become
delinquent on QM loans, meaning an
increase in consumers with delinquent
loans who do not have the benefit of the
ability-to-repay causes of action and
defenses against foreclosure.
Tables 5 and 6 in part V.C provide
historical early delinquency rates for
loans under different combinations of
DTI ratio and rate spread. Under the
proposal, conventional loans originated
with rate spreads below 2 percentage
points and DTI above 43 percent would
newly fall within the amended General
QM loan definition relative to the
baseline. Based on the number and
characteristics of 2018 HMDA
originations, the Bureau estimates 8,000
to 59,000 additional General QM loans
annually could become delinquent
within two years of origination, based
on the observed early delinquencies
from Table 6 (2018) and Table 5 (2002–
2008), respectively. Further, consumers
who would have been limited in the
amount they could borrow due to the
DTI limit under the baseline may obtain
larger mortgages at higher DTI levels,
further increasing the expected number
of delinquencies. However, given that
many of these loans may have been
originated as FHA (or other non-General
QM) loans under the baseline, the
increase in delinquent loans held by
consumers without the ability-to-repay
causes of action and defenses against
foreclosure is likely smaller than the
upper bound estimates cited above.
For the estimated 28,000 consumers
obtaining low-DTI General QM or
Temporary GSE QM loans priced 2
percentage points or more above APOR
under the baseline, the amended
General QM loan definition may restrict
access to conventional QM credit. There
are several possible outcomes for these
consumers. Many may instead obtain
FHA loans, likely paying higher total
loan costs as discussed in part VII.B.1.
Others may be able to obtain General
QM loans priced below 2 percentage
points over APOR due to creditor
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responses to the proposal or obtain
loans under the Small Creditor QM
definition. However, some consumers
may not be able to obtain a mortgage at
all. The Bureau requests data or
evidence that could inform estimates for
the likelihood of these outcomes among
consumers with low-DTI General QM or
Temporary GSE QM loans priced 2
percentage points or more above APOR.
In addition, the proposal could slow
the development of the non-QM market,
particularly new mortgage products
which may have become available
under the baseline. To the extent that
some consumers would prefer some of
these products to conventional QM
loans due to pricing, verification
flexibility, or other advantages, the
delay of their development would be a
cost to consumers of the proposal.
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4. Costs to Covered Persons
For creditors retaining the credit risk
of their General QM mortgages (e.g.,
portfolio loans and private
securitizations), an increase in High-DTI
General QM originations may lead to
increased risk of credit losses. There is
reason to believe, however, that on
average the effects on portfolio lenders
may be small. Creditors that hold loans
on portfolio have an incentive to verify
ability to repay regardless of liability
under the ATR provisions, because they
hold the credit risk. While portfolio
lenders (or those who manage the
portfolios) may recognize and respond
to this incentive to different degrees, the
proposed rule is likely on average to
cause a small increase in the willingness
of these creditors to originate loans with
a greater risk of default and credit
losses, such as certain loans with high
DTI ratios. The credit losses to investors
in private securitizations are harder to
predict. In general, these losses would
depend on the scrutiny that investors
are willing and able to give to the nonQM loans under the baseline that
become QM loans (with high DTI ratios)
under the proposed rule. It is possible,
however, that the reduction in liability
under the ATR provisions would lead to
securitizations with more loans that
have a greater risk of default and credit
losses.
In addition, creditors would generally
no longer be able to originate low-DTI
conventional loans priced 2 percentage
points or higher above APOR as General
QMs under the proposal.309 Creditors
may be able to originate some of these
loans at prices below 2 percentage
309 The comparable thresholds are 6.5 percentage
points over APOR for loans priced under $65,939
and 3.5 percentage points over APOR for loans
priced under $109,898 but at or above $65,939.
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points above APOR or as non-QM or
other types of QM loans, but in any of
these cases may pay higher costs or
receive lower revenues relative to under
the baseline. If creditors are unable to
originate such loans at all, they would
see a larger reduction in revenue.
The proposal also generates what are
effectively transfers between creditors
relative to the baseline, reflecting
reduced loan origination volume for
creditors who primarily originate FHA
or private non-QM loans and increased
origination volume for creditors who
primarily originate conventional QM
loans. Business models vary
substantially within market segments,
with portfolio lenders and lenders
originating non-QM loans most likely to
forgo market share gains possible under
the baseline, while GSE-focused bank
and non-bank creditors are likely to
maintain market share that might be lost
in the absence of the proposal.
5. Other Benefits and Costs
The proposal may limit the
development of the secondary market
for non-QM mortgage loan securities.
Under the baseline, those loans that do
not fit within General QM requirements
represent a potential new market for
non-QM securitizations. Thus, the
proposal would reduce the scope of the
potential non-QM market, likely
lowering profits and revenues for
participants in the private secondary
market. This would effectively be a
transfer from these non-QM secondary
market participants to participants in
the agency or other QM loan secondary
markets.
6. Alternatives
A potential alternative to the
proposed rule is maintaining the
General QM loan definition’s DTI limit
but at a higher level, for example, 45 or
50 percent. The Bureau estimates the
effects of such alternatives relative to
the proposed rule, assuming no change
in consumer or creditor behavior. For an
alternative General QM loan definition
with a DTI limit of 45 percent, the
Bureau estimates that 662,000 fewer
loans would be General QM due to DTI
ratios over 45 percent, while 32,000
additional loans with rate spreads above
the proposed rule’s QM pricing
thresholds would newly fit within the
General QM loan definition due to DTI
ratios at or below 45 percent. For an
alternative DTI limit of 50 percent, the
Bureau estimates 48,000 fewer loans
would fit within the General QM loan
definition due to DTI ratios over 50
percent, while 41,000 additional loans
with rate spreads above the proposed
rule’s QM pricing thresholds would
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newly fit within the General QM loan
definition due to DTI ratios at or below
50 percent.
In addition to these effects on the
composition of loans within the General
QM loan definition, the Bureau uses the
historical delinquency rates from Tables
5 and 6 in part V.C to estimate the
number of loans expected to become
delinquent within the General QM loan
definition relative to the proposal. The
Bureau estimates that under an
alternative DTI limit of 45 percent,
4,000 to 35,000 fewer General QM loans
would become delinquent relative to the
proposal, based on delinquency rates for
2018 and 2002–2008 originations
respectively. Under an alternative DTI
limit of 50 percent, the Bureau estimates
approximately 1,000 additional General
QM loans would become delinquent
relative to the proposal, due to loans
priced 2 percentage points or more
above APOR gaining QM status.
For an alternative DTI limit of 45
percent, these estimates collectively
indicate that substantially fewer loans
would fit within the General QM loan
definition relative to the proposal,
which would also reduce the number of
General QM loans becoming delinquent.
By contrast, the estimates indicate that
an alternative DTI limit of 50 percent
would lead to a comparable number of
General QM loans relative to the
proposal, both overall and among those
that would become delinquent.
However, consumer and creditor
responses to such alternatives, such as
reducing loan amounts to lower DTI
ratios, could increase the number of
loans that fit within the General QM
loan definition relative to the proposal.
Other potential alternatives to the
proposed rule could impose a DTI limit
only for loans above a certain pricing
threshold, for example a DTI limit of 50
percent for loans with rate spreads at or
above 1 percentage point.310 Such an
alternative would function as a hybrid
of the proposal and an alternative which
maintains a DTI limit at a higher level,
50 percent in the case of this example.
As a result, the number of loans fitting
310 As discussed in part V.E, a similar approach
could impose a DTI limit above a certain pricing
threshold and also tailor the presumption of
compliance with the ATR requirement based on
DTI. For example, the rule could provide that (1)
for loans with rate spreads under 1 percentage
point, the loan is a safe harbor QM regardless of the
consumer’s DTI ratio; (2) for loans with rate spreads
at or above 1 but less than 1.5 percentage points,
a loan is a safe harbor QM if the consumer’s DTI
ratio does not exceed 50 percent and a rebuttable
presumption QM if the consumer’s DTI is above 50
percent; and (3) if the rate spread is at or above 1.5
but less than 2 percentage points, loans would be
rebuttable presumption QM if the consumer’s DTI
ratio does not exceed 50 percent and non-QM if the
DTI ratio is above 50 percent.
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within the General QM loan definition
would generally be between the
Bureau’s estimates for the proposal and
its estimates for the corresponding
alternative which maintains the higher
DTI limit. Thus, this hybrid approach
would bring fewer loans within the
General QM loan definition compared to
the proposal but more loans within the
General QM loan definition compared to
the alternative DTI limit of 50 percent,
both overall and among loans that
would become delinquent.
C. Potential Impact on Depository
Institutions and Credit Unions With $10
Billion or Less in Total Assets, as
Described in Section 1026
The proposal’s expected impact on
depository institutions and credit
unions that are also creditors making
covered loans (depository creditors)
with $10 billion or less in total assets is
similar to the expected impact on larger
depository creditors and on nondepository creditors. As discussed in
part VII.B.4 (Costs to Covered Persons),
depository creditors originating
portfolio loans may forgo potential
market share gains that would occur in
the absence of the proposal. In addition,
depository creditors with $10 billion or
less in total assets that originate
portfolio loans can originate High-DTI
Small Creditor QM loans under the rule.
These depository creditors may
currently rely less on the Temporary
GSE QM loan definition for originating
High-DTI loans. If the expiration of the
Temporary GSE QM loan definition
would confer a competitive advantage to
these small creditors in their origination
of High-DTI loans, the proposal would
offset this outcome.
Conversely, those small depository
creditors that primarily rely on the GSEs
as a secondary market outlet because
they do not have the capacity to hold
numerous loans on portfolio or the
infrastructure or scale to securitize loans
may continue to benefit from the ability
to make High-DTI GSE loans as QM
loans. In the absence of the proposal,
these creditors would be limited to
originating GSE loans as QMs only with
DTI at or below 43 percent under the
current General QM loan definition.
These creditors may also originate FHA,
VA, or USDA loans or non-QM loans for
private securitizations, likely at a higher
cost relative to originating Temporary
GSE QM loans. The proposed rule
would allow these creditors to originate
more GSE loans under the General QM
loan definition and have a lower cost of
origination relative to the baseline.311
311 Alternative approaches, such as retaining a
DTI limit of 45 or 50 percent, would have similar
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D. Potential Impact on Rural Areas
The proposal’s expected impact on
rural areas is similar to the expected
impact on non-rural areas. Based on
2018 HMDA data, the Bureau estimates
that High-DTI conventional purchase
mortgages originated for homes in rural
areas are approximately as likely to be
reported as initially sold to the GSEs
(52.5 percent) as loans in non-rural
areas (52 percent).312 In addition, the
Bureau estimates that in 2018, 95.6
percent of conventional purchase loans
originated for homes in rural areas
would have been QM loans under the
proposal, similar to the Bureau’s
estimate for all conventional purchase
loans in rural and non-rural areas (96.1
percent).313
VIII. Regulatory Flexibility Act
Analysis
The Regulatory Flexibility Act (RFA),
as amended by the Small Business
Regulatory Enforcement Fairness Act of
1996, requires each agency to consider
the potential impact of its regulations on
small entities, including small
businesses, small governmental units,
and small not-for-profit organizations.
The RFA defines a ‘‘small business’’ as
a business that meets the size standard
developed by the Small Business
Administration pursuant to the Small
Business Act.314
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).315 The Bureau also is
subject to certain additional procedures
under the RFA involving the convening
effects of allowing small depository creditors
originate more GSE loans under an expanded
General QM loan definition relative to the baseline,
while offsetting potential competitive advantages
for small depository creditors that originate Small
Creditor QM loans.
312 These statistics are estimated based on
originations from the first nine months of the year,
to allow time for loans to be sold before HMDA
reporting deadlines. In addition, a higher share of
High-DTI conventional purchase non-rural loans
(33.3 percent) report being sold to other non-GSE
purchasers compared to rural loans (22.3 percent).
313 For alternative approaches, the Bureau
estimates 84.7 percent of conventional purchase
loans for homes in rural areas would have been
QMs under a DTI limit of 45 percent, and 95.7
percent of conventional purchase loans for homes
in rural areas would have been QMs under a DTI
limit of 50 percent.
314 5 U.S.C. 601(3) (the Bureau may establish an
alternative definition after consultation with the
Small Business Administration and an opportunity
for public comment).
315 5 U.S.C. 603–605.
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41771
of a panel to consult with small
business representatives before
proposing a rule for which an IRFA is
required.316
An IRFA is not required for this
proposal because the proposal, if
adopted, would not have a SISNOSE. As
the below analysis makes clear, relative
to the baseline, the proposed rule has
only one sizeable adverse effect. Certain
loans with DTI ratios under 43 percent
that would otherwise be originated as
rebuttable presumption QM loans under
the baseline would be non-QM loans
under the proposal. The proposal would
also have a number of more minor
effects on small entities which are not
quantified in this analysis, including
adjustments to the APR calculation used
for certain ARMs when determining QM
status; amendments to the Rule’s
requirements to consider and verify
income, assets, debt obligations,
alimony, and child support; and the
addition of DTI as a factor consumers
may use to rebut the QM presumption
of compliance for loans priced 1.5
percentage points or more over APOR.
The Bureau expects only small increases
or decreases in burden from these more
minor effects.
The analysis divides potential
originations into different categories and
considers whether the proposed rule has
any adverse impact on originations
relative to the baseline. Note that under
the baseline, the category of Temporary
GSE QM loans no longer exists. The
Bureau has identified five categories of
small entities that may be subject to the
proposed provisions: Commercial
banks, savings institutions and credit
unions (NAICS 522110, 522120, and
522130) with assets at or below $600
million; mortgage brokers (NAICS
522310) with average annual receipts at
or below $8 million; and mortgage
companies (NAICS 522292 and 522298)
with average annual receipts at or below
$41.5 million. As discussed further
below, the Bureau relies primarily on
2018 HMDA data for the analysis.317
Type I: First Liens That Are Not Small
Loans, DTI Is Over 43 Percent
Under the baseline, small entities
cannot originate Type I loans as safe
harbor or rebuttable presumption QM
316 5
U.S.C. 609.
317 Non-depositories
are classified as small
entities if they had fewer than 5,188 total
originations in 2018. The classification for nondepositories is based on the SBA small entity
definition for mortgage companies (less than $41.5
million in annual revenues) and an estimate of
$8,000 for revenue-per-origination from the
Assessment Report, supra note 58, at 78. The
HMDA data do not directly distinguish mortgage
brokers from mortgage companies, so the more
inclusive revenue threshold is used.
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loans unless they are also small
creditors and comply with the
additional requirements of the small
creditor QM category. Neither the
removal of DTI requirements nor the
addition of the pricing conditions have
an adverse impact on the ability of small
entities to originate these loans.
Type II: First Liens That Are Not Small
Loans, DTI Is 43 Percent or Under
Under the baseline, small entities can
originate these loans as either safe
harbor QM or rebuttable presumption
QM, depending on pricing. The removal
of DTI requirements has no adverse
impact on the ability of small entities to
originate these loans. The addition of
the pricing conditions has no adverse
impact on the ability of small creditors
to originate these loans as safe harbor
QM loans: A loan with APR within 1.5
percentage points of APOR that can be
originated as a safe harbor QM loan
under the baseline can be originated as
a safe harbor QM loan under the pricing
conditions of the proposed rule.
Similarly, the addition of the pricing
conditions has no adverse impact on the
ability of small creditors to originate
rebuttable presumption QM loans with
APR between 1.5 percentage points and
2 percentage points over APOR. The
addition of the pricing conditions
would, however, prevent small creditors
from originating rebuttable presumption
QM loans with APR 2 percentage points
or more over APOR. In the SISNOSE
analysis below, the Bureau
conservatively assumes that none of
these loans would be originated.
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Type III: First-Liens That Are Small
Loans
Under the baseline, small entities can
originate these loans as General QM
loans if they have DTI ratios at or below
the DTI limit of 43 percent. The
proposal’s amended General QM loan
definition preserves QM status for some
smaller, low-DTI loans priced 2
percentage points or more over APOR.
Specifically, loans under $65,939 with
APR less than 6.5 percentage points
over APOR and loans under $109,898
with APR less than 3.5 percentage
points over APOR can be originated as
General QM loans, assuming they meet
all other General QM requirements. The
proposal would prevent small creditors
from originating smaller, low-DTI loans
with APR at or above these higher
thresholds as General QM loans. For the
SISNOSE analysis below, the Bureau
conservatively assumes that none of
these loans would be originated.
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Type IV: Closed-End Subordinate-Liens
Under the baseline, small entities can
originate these loans as General QM
loans if they have DTI ratios at or below
the DTI limit of 43 percent. The
proposal’s amended General QM loan
definition creates new pricing
thresholds for subordinate-lien
originations. Subordinate-lien loans
under $65,939 with APR less than 6.5
percentage points over APOR and larger
subordinate-lien loans with APR less
than 3.5 percentage points over APOR
can be originated as General QM loans,
assuming they meet all other General
QM requirements. The proposal would
prevent small creditors from originating
low-DTI, subordinate-lien loans with
APR at or above these thresholds as
General QM loans. For the SISNOSE
analysis below, the Bureau
conservatively assumes that none of
these loans would be originated.
Analysis
For purposes of this analysis, the
Bureau assumes that average annual
receipts for small entities is
proportional to mortgage loan
origination volume. The Bureau further
assumes that a small entity experiences
a significant negative effect from the
proposed rule if the proposed rule
would cause a reduction in origination
volume of over 2 percent. Using the
2018 HMDA data, the Bureau estimates
that if none of the Type II, III, or IV
loans adversely affected were
originated, 149 small entities would
experience a loss of over 2 percent in
mortgage loan origination volume. Thus,
there are at most 149 small entities that
experience a significant adverse
economic impact. The Bureau estimates
that there are 2,027 small entities in the
HMDA data. 149 is not a substantial
number relative to 2,027.
The Bureau recognizes that there are
small entities that originate mortgage
credit that do not report HMDA data.
The Bureau has no reason to expect,
however, that small entities that
originate mortgage credit that do not
report HMDA data would be affected
differently from small HMDA reporters
by the proposed rule. In other words,
the Bureau expects that including
HMDA non-reporters in the analysis
would increase the number of small
entities that would experience a loss of
over 2 percent in mortgage loan
origination volume and the number of
relevant small entities by the same
proportion. Thus, the overall number of
small entities that would experience a
significant adverse economic impact
would not be a substantial number of
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the overall number of small entities that
originate mortgage credit.
Accordingly, the Director certifies that
this proposal, if adopted, would not
have a significant economic impact on
a substantial number of small entities.
The Bureau requests comment on its
analysis of the impact of the proposal on
small entities and requests any relevant
data.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act
of 1995 (PRA),318 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.
The Bureau has determined that this
proposal does not contain any new or
substantively revised information
collection requirements other than those
previously approved by OMB under
OMB control number 3170–0015. The
proposal would amend 12 CFR part
1026 (Regulation Z), which implements
TILA. OMB control number 3170–0015
is the Bureau’s OMB control number for
Regulation Z.
The Bureau welcomes comments on
these determinations or any other aspect
of the proposal for purposes of the PRA.
X. Signing Authority
The Director of the Bureau, having
reviewed and approved this document,
is delegating the authority to
electronically sign this document to
Laura Galban, a Bureau Federal Register
Liaison, for purposes of publication in
the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, 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 proposes to amend Regulation Z,
12 CFR part 1026, as set forth below:
PART 1026—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 1026
continues to read as follows:
■
318 44
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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
2. Amend § 1026.43 by revising
paragraphs (b)(4), (e)(2)(v) and (vi),
(e)(4), (e)(5)(i)(A) and (B), and (f)(1)(i)
and (iii) to read as follows:
■
§ 1026.43 Minimum standards for
transactions secured by a dwelling.
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*
*
*
*
*
(b) * * *
(4) Higher-priced covered transaction
means a covered transaction with an
annual percentage rate that exceeds the
average prime offer rate for a
comparable transaction as of the date
the interest rate is set by 1.5 or more
percentage points for a first-lien covered
transaction, other than a qualified
mortgage under paragraph (e)(5), (e)(6),
or (f) of this section; by 3.5 or more
percentage points for a first-lien covered
transaction that is a qualified mortgage
under paragraph (e)(5), (e)(6), or (f) of
this section; or by 3.5 or more
percentage points for a subordinate-lien
covered transaction. For purposes of a
qualified mortgage under paragraph
(e)(2) of this section, for a loan for
which the interest rate may or will
change within the first five years after
the date on which the first regular
periodic payment will be due, the
creditor must determine the annual
percentage rate for purposes of this
paragraph (b)(4) by treating the
maximum interest rate that may apply
during that five-year period as the
interest rate for the full term of the loan.
*
*
*
*
*
(e) * * *
(2) * * *
(v) For which the creditor, at or before
consummation:
(A) Considers the consumer’s income
or assets, debt obligations, alimony,
child support, and monthly debt-toincome ratio or residual income, using
the amounts determined from paragraph
(e)(2)(v)(B) of this section. For purposes
of this paragraph (e)(2)(v)(A), the
consumer’s monthly debt-to-income
ratio or residual income is determined
in accordance with paragraph (c)(7) of
this section, except that the consumer’s
monthly payment on the covered
transaction, including the monthly
payment for mortgage-related
obligations, is calculated in accordance
with paragraph (e)(2)(iv) of this section.
(B)(1) Verifies the consumer’s current
or reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan using
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third-party records that provide
reasonably reliable evidence of the
consumer’s income or assets, in
accordance with paragraph (c)(4) of this
section; and
(2) Verifies the consumer’s current
debt obligations, alimony, and child
support using reasonably reliable thirdparty records in accordance with
paragraph (c)(3) of this section.
(vi) For which the annual percentage
rate does not exceed the average prime
offer rate for a comparable transaction as
of the date the interest rate is set by the
amounts specified in paragraphs
(e)(2)(vi)(A) through (E) of this section.
The amounts specified here shall be
adjusted annually on January 1 by the
annual percentage change in the
Consumer Price Index for All Urban
Consumers (CPI–U) that was reported
on the preceding June 1. For purposes
of this paragraph (e)(2)(vi), the creditor
must determine the annual percentage
rate for a loan for which the interest rate
may or will change within the first five
years after the date on which the first
regular periodic payment will be due by
treating the maximum interest rate that
may apply during that five-year period
as the interest rate for the full term of
the loan.
(A) For a first-lien covered transaction
with a loan amount greater than or equal
to $109,898 (indexed for inflation), 2 or
more percentage points;
(B) For a first-lien covered transaction
with a loan amount greater than or equal
to $65,939 (indexed for inflation) but
less than $109,898 (indexed for
inflation), 3.5 or more percentage
points;
(C) For a first-lien covered transaction
with a loan amount less than $65,939
(indexed for inflation), 6.5 or more
percentage points;
(D) For a subordinate-lien covered
transaction with a loan amount greater
than or equal to $65,939 (indexed for
inflation), 3.5 or more percentage
points;
(E) For a subordinate-lien covered
transaction with a loan amount less than
$65,939 (indexed for inflation), 6.5 or
more percentage points.
*
*
*
*
*
(4) Qualified mortgage defined—other
agencies. Notwithstanding paragraph
(e)(2) of this section, a qualified
mortgage is a covered transaction that is
defined as a qualified mortgage by the
U.S. Department of Housing and Urban
Development under 24 CFR 201.7 and
24 CFR 203.19, the U.S. Department of
Veterans Affairs under 38 CFR 36.4300
and 38 CFR 36.4500, or the U.S.
Department of Agriculture under 7 CFR
3555.109.
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(5) * * *
(i) * * *
(A) That satisfies the requirements of
paragraph (e)(2) of this section other
than the requirements of paragraphs
(e)(2)(v) and (vi);
(B) For which the creditor:
(1) Considers and verifies at or before
consummation the consumer’s current
or reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan, in
accordance with paragraphs (c)(2)(i) and
(c)(4) of this section;
(2) Considers and verifies at or before
consummation the consumer’s current
debt obligations, alimony, and child
support in accordance with paragraphs
(c)(2)(vi) and (c)(3) of this section;
(3) Considers at or before
consummation the consumer’s monthly
debt-to-income ratio or residual income
and verifies the debt obligations and
income used to determine that ratio in
accordance with paragraph (c)(7) of this
section, except that the calculation of
the payment on the covered transaction
for purposes of determining the
consumer’s total monthly debt
obligations in paragraph (c)(7)(i)(A)
shall be determined in accordance with
paragraph (e)(2)(iv) of this section
instead of paragraph (c)(5) of this
section;
*
*
*
*
*
(f) * * *
(1) * * *
(i) The loan satisfies the requirements
for a qualified mortgage in paragraphs
(e)(2)(i)(A) and (e)(2)(ii) and (iii) of this
section;
*
*
*
*
*
(iii) The creditor:
(A) Considers and verifies at or before
consummation the consumer’s current
or reasonably expected income or assets
other than the value of the dwelling
(including any real property attached to
the dwelling) that secures the loan, in
accordance with paragraphs (c)(2)(i) and
(c)(4) of this section;
(B) Considers and verifies at or before
consummation the consumer’s current
debt obligations, alimony, and child
support in accordance with paragraphs
(c)(2)(vi) and (c)(3) of this section;
(C) Considers at or before
consummation the consumer’s monthly
debt-to-income ratio or residual income
and verifies the debt obligations and
income used to determine that ratio in
accordance with paragraph (c)(7) of this
section, except that the calculation of
the payment on the covered transaction
for purposes of determining the
consumer’s total monthly debt
obligations in (c)(7)(i)(A) shall be
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determined in accordance with
paragraph (f)(1)(iv)(A) of this section,
together with the consumer’s monthly
payments for all mortgage-related
obligations and excluding the balloon
payment;
*
*
*
*
*
Appendix Q to Part 1026 [Removed]
■ 3. Remove Appendix Q to Part 1026.
■ 4. In Supplement I to Part 1026—
Official Interpretations, under Section
1026.43—Minimum Standards for
Transactions Secured by a Dwelling:
■ a. Revise 43(b)(4), 43(c)(4), and
43(c)(7);
■ b. Revise Paragraph 43(e)(2)(v);
■ c. Add Paragraphs 43(e)(2)(v)(A) and
43(e)(2)(v)(B) (after Paragraph
43(e)(2)(v));
■ d. Revise Paragraph 43(e)(2)(vi);
■ e. Revise 43(e)(4); and
■ f. Revise Paragraph 43(e)(5),
Paragraph 43(f)(1)(i), and e Paragraph
43(f)(1)(iii).
The revisions and additions read as
follows:
Supplement I to Part 1026—Official
Interpretations
*
*
*
*
*
Section 1026.43—Minimum Standards
for Transactions Secured by a Dwelling
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*
*
*
*
*
43(b)(4) Higher-Priced Covered
Transaction
1. Average prime offer rate. The
average prime offer rate is defined in
§ 1026.35(a)(2). For further explanation
of the meaning of ‘‘average prime offer
rate,’’ and additional guidance on
determining the average prime offer
rate, see comments 35(a)(2)–1 through
–4.
2. Comparable transaction. A higherpriced covered transaction is a
consumer credit transaction that is
secured by the consumer’s dwelling
with an annual percentage rate that
exceeds by the specified amount the
average prime offer rate for a
comparable transaction as of the date
the interest rate is set. The published
tables of average prime offer rates
indicate how to identify a comparable
transaction. See comment 35(a)(2)–2.
3. Rate set. A transaction’s annual
percentage rate is compared to the
average prime offer rate as of the date
the transaction’s interest rate is set (or
‘‘locked’’) before consummation.
Sometimes a creditor sets the interest
rate initially and then re-sets it at a
different level before consummation.
The creditor should use the last date the
interest rate is set before consummation.
4. Determining the annual percentage
rate for certain loans for which the
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interest rate may or will change.
Provisions in subpart C of this part,
including the commentary to
§ 1026.17(c)(1), address how to
determine the annual percentage rate
disclosures for closed-end credit
transactions. Provisions in
§ 1026.32(a)(3) address how to
determine the annual percentage rate to
determine coverage under
§ 1026.32(a)(1)(i). Section 1026.43(b)(4)
requires, only for the purposes of a
qualified mortgage under
§ 1026.43(e)(2), a different
determination of the annual percentage
rate for purposes of § 1026.43(b)(4) for a
loan for which the interest rate may or
will change within the first five years
after the date on which the first regular
periodic payment will be due. See
comment 43(e)(2)(vi)–4 for how to
determine the annual percentage rate of
such a loan.
*
*
*
*
*
43(c)(4) Verification of Income or
Assets
1. Income or assets relied on. A
creditor need consider, and therefore
need verify, only the income or assets
the creditor relies on to evaluate the
consumer’s repayment ability. See
comment 43(c)(2)(i)–2. For example, if a
consumer’s application states that the
consumer earns a salary and is paid an
annual bonus and the creditor relies on
only the consumer’s salary to evaluate
the consumer’s repayment ability, the
creditor need verify only the salary. See
also comments 43(c)(3)–1 and –2.
2. Multiple applicants. If multiple
consumers jointly apply for a loan and
each lists income or assets on the
application, the creditor need verify
only the income or assets the creditor
relies on in determining repayment
ability. See comment 43(c)(2)(i)–5.
3. Tax-return transcript. Under
§ 1026.43(c)(4), a creditor may verify a
consumer’s income using an Internal
Revenue Service (IRS) tax-return
transcript, which summarizes the
information in a consumer’s filed tax
return, another record that provides
reasonably reliable evidence of the
consumer’s income, or both. A creditor
may obtain a copy of a tax-return
transcript or a filed tax return directly
from the consumer or from a service
provider. A creditor need not obtain the
copy directly from the IRS or other
taxing authority. See comment 43(c)(3)–
2.
4. Unidentified funds. A creditor does
not meet the requirements of
§ 1026.43(c)(4) if it observes an inflow of
funds into the consumer’s account
without confirming that the funds are
income. For example, a creditor would
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not meet the requirements of
§ 1026.43(c)(4) where it observes an
unidentified $5,000 deposit in the
consumer’s account but fails to take any
measures to confirm or lacks any basis
to conclude that the deposit represents
the consumer’s personal income and
not, for example, proceeds from the
disbursement of a loan.
*
*
*
*
*
43(c)(7) Monthly Debt-to-Income Ratio
or Residual Income
1. Monthly debt-to-income ratio or
monthly residual income. Under
§ 1026.43(c)(2)(vii), the creditor must
consider the consumer’s monthly debtto-income ratio, or the consumer’s
monthly residual income, in accordance
with the requirements in § 1026.43(c)(7).
Section 1026.43(c) does not prescribe a
specific monthly debt-to-income ratio
with which creditors must comply.
Instead, an appropriate threshold for a
consumer’s monthly debt-to-income
ratio or monthly residual income is for
the creditor to determine in making a
reasonable and good faith determination
of a consumer’s ability to repay.
2. Use of both monthly debt-to-income
ratio and monthly residual income. If a
creditor considers the consumer’s
monthly debt-to-income ratio, the
creditor may also consider the
consumer’s residual income as further
validation of the assessment made using
the consumer’s monthly debt-to-income
ratio.
3. Compensating factors. The creditor
may consider factors in addition to the
monthly debt-to-income ratio or
residual income in assessing a
consumer’s repayment ability. For
example, the creditor may reasonably
and in good faith determine that a
consumer has the ability to repay
despite a higher debt-to-income ratio or
lower residual income in light of the
consumer’s assets other than the
dwelling, including any real property
attached to the dwelling, securing the
covered transaction, such as a savings
account. The creditor may also
reasonably and in good faith determine
that a consumer has the ability to repay
despite a higher debt-to-income ratio in
light of the consumer’s residual income.
*
*
*
*
*
Paragraph 43(e)(2)(v)
1. General. For guidance on satisfying
§ 1026.43(e)(2)(v), a creditor may rely on
commentary to § 1026.43(c)(2)(i) and
(vi), (c)(3), and (c)(4).
Paragraph 43(e)(2)(v)(A)
1. Consider. In order to comply with
the requirement to consider income or
assets, debt obligations, alimony, child
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support, and monthly debt-to-income
ratio or residual income under
§ 1026.43(e)(2)(v)(A), a creditor must
take into account income or assets, debt
obligations, alimony, child support, and
monthly debt-to-income ratio or
residual income in its ability-to-repay
determination. Under § 1026.25(a), a
creditor must retain documentation
showing how it took into account
income or assets, debt obligations,
alimony, child support, and monthly
debt-to-income ratio or residual income
in its ability-to-repay determination.
Examples of such documentation may
include, for example, an underwriter
worksheet or a final automated
underwriting system certification, alone
or in combination with the creditor’s
applicable underwriting standards, that
shows how these required factors were
taken into account in the creditor’s
ability-to-repay determination.
2. Requirement to consider monthly
debt-to-income ratio or residual income.
Section 1026.43(e)(2)(v)(A) does not
prescribe specifically how a creditor
must consider monthly debt-to-income
ratio or residual income. Section
1026.43(e)(2)(v)(A) also does not
prescribe a particular monthly debt-toincome ratio or residual income
threshold with which a creditor must
comply. A creditor may, for example,
consider monthly debt-to-income ratio
or residual income by establishing
monthly debt-to-income or residual
income thresholds for its own
underwriting standards and
documenting how it applied those
thresholds to determine the consumer’s
ability to repay. A creditor may also
consider these factors by establishing
monthly debt-to-income or residual
income thresholds and exceptions to
those thresholds based on other
compensating factors, and documenting
application of the thresholds along with
any applicable exceptions.
3. Flexibility to consider additional
factors related to a consumer’s ability to
repay. The requirement to consider
income or assets, debt obligations,
alimony, child support, and monthly
debt-to-income ratio or residual income
does not preclude the creditor from
taking into account additional factors
that are relevant in determining a
consumer’s ability to repay the loan. For
guidance on considering additional
factors in determining the consumer’s
ability to repay, see comment 43(c)(7)–
3.
Paragraph 43(e)(2)(v)(B)
1. Verification of income, assets, debt
obligations, alimony, and child support.
Section 1026.43(e)(2)(v)(B) does not
prescribe specific methods of
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underwriting that creditors must use.
Section 1026.43(e)(2)(v)(B)(1) requires a
creditor to verify the consumer’s current
or reasonably expected income or assets
(including any real property attached to
the value of the dwelling) that secures
the loan in accordance with
§ 1026.43(c)(4), which states that a
creditor must verify such amounts using
third-party records that provide
reasonably reliable evidence of the
consumer’s income or assets. Section
1026.43(e)(2)(v)(B)(2) requires a creditor
to verify the consumer’s current debt
obligations, alimony, and child support
in accordance with § 1026.43(c)(3),
which states that a creditor must verify
such amounts using reasonably reliable
third-party records. So long as a creditor
complies with the provisions of
§ 1026.43(c)(3) with respect to debt
obligations, alimony, and child support
and § 1026.43(c)(4) with respect to
income and assets, the creditor is
permitted to use any reasonable
verification methods and criteria.
2. Classifying and counting income,
assets, debt obligations, alimony, and
child support. ‘‘Current and reasonably
expected income or assets other than the
value of the dwelling (including any
real property attached to the dwelling)
that secures the loan’’ is determined in
accordance with § 1026.43(c)(2)(i) and
its commentary. ‘‘Current debt
obligations, alimony, and child
support’’ has the same meaning as
under § 1026.43(c)(2)(vi) and its
commentary. Section 1026.43(c)(2)(i)
and (vi) and the associated commentary
apply to a creditor’s determination with
respect to what inflows and property it
may classify and count as income or
assets and what obligations it must
classify and count as debt obligations,
alimony, and child support, pursuant to
its compliance with
§ 1026.43(e)(2)(v)(B).
3. Safe harbor for compliance with
specified external standards.
i. Meeting the standards in the
following documents for verifying
current or reasonably expected income
or assets using third-party records
provides a creditor with reasonably
reliable evidence of the consumer’s
income or assets. Meeting the standards
in the following documents for verifying
current debt obligations, alimony, and
child support obligation using thirdparty records provides a creditor with
reasonably reliable evidence of the
consumer’s debt obligations, alimony,
and child support obligations.
Accordingly, a creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
verification standards in one or more of
the following documents: [List to be
Determined, as Discussed in Preamble].
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ii. Applicable provisions in standards.
A creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
requirements in the standards listed in
comment 43(e)(2)(v)(B)–3 for creditors
to verify income, assets, debt
obligations, alimony and child support
using specified documents or to include
or exclude particular inflows, property,
and obligations as income, assets, debt
obligations, alimony, and child support.
iii. Inapplicable provisions in
standards. For purposes of compliance
with § 1026.43(e)(2)(v)(B), a creditor
need not comply with requirements in
the standards listed in comment
43(e)(2)(v)(B)–3 other than those that
require lenders to verify income, assets,
debt obligations, alimony and child
support using specified documents or to
classify and count particular inflows,
property, and obligations as income,
assets, debt obligations, alimony, and
child support.
iv. Revised versions of standards. A
creditor also complies with
§ 1026.43(e)(2)(v)(B) where it complies
with revised versions of the standards
listed in comment 43(e)(2)(v)(B)–3.i,
provided that the two versions are
substantially similar.
v. Use of standards from more than
one document. A creditor complies with
§ 1026.43(e)(2)(v)(B) if it complies with
the verification standards in one or
more of the documents specified in
comment 43(e)(2)(v)(B)–3.i.
Accordingly, a creditor may, but need
not, comply with § 1026.43(e)(2)(v)(B)
by complying with the verification
standards from more than one document
(in other words, by ‘‘mixing and
matching’’ verification standards).
Paragraph 43(e)(2)(vi)
1. Determining the average prime offer
rate for a comparable transaction as of
the date the interest rate is set. For
guidance on determining the average
prime offer rate for a comparable
transaction as of the date the interest
rate is set, see comments 43(b)(4)–1
through –3.
2. Determination of applicable
threshold. A creditor must determine
the applicable threshold by determining
which category the loan falls into based
on the face amount of the note (the
‘‘loan amount’’ as defined in
§ 1026.43(b)(5)). For example, for a firstlien covered transaction with a loan
amount of $75,000, the loan would fall
into the tier for loans greater than or
equal to $65,939 (indexed for inflation)
but less than $109,898 (indexed for
inflation), for which the applicable
threshold is 3.5 or more percentage
points.
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3. Annual adjustment for inflation.
The dollar amounts in
§ 1026.43(e)(2)(vi) will be adjusted
annually on January 1 by the annual
percentage change in the CPI–U that
was in effect on the preceding June 1.
The Bureau will publish adjustments
after the June figures become available
each year.
4. Determining the annual percentage
rate for certain loans for which the
interest rate may or will change.
i. In general. The commentary to
§ 1026.17(c)(1) and other provisions in
subpart C address how to determine the
annual percentage rate disclosures for
closed-end credit transactions.
Provisions in § 1026.32(a)(3) address
how to determine the annual percentage
rate to determine coverage under
§ 1026.32(a)(1)(i). Section
1026.43(e)(2)(vi) requires, for the
purposes of § 1026.43(e)(2)(vi), a
different determination of the annual
percentage rate for a qualified mortgage
under § 1026.43(e)(2) for which the
interest rate may or will change within
the first five years after the date on
which the first regular periodic payment
will be due. An identical special rule for
determining the annual percentage rate
for such a loan also applies for purposes
of § 1026.43(b)(4).
ii. Loans for which the interest rate
may or will change. Section
1026.43(e)(2)(vi) includes a special rule
for determining the annual percentage
rate for a loan for which the interest rate
may or will change within the first five
years after the date on which the first
regular periodic payment will be due.
This rule applies to adjustable-rate
mortgages that have a fixed-rate period
of five years or less and to step-rate
mortgages for which the interest rate
changes within that five-year period.
iii. Maximum interest rate during the
first five years. For a loan for which the
interest rate may or will change within
the first five years after the date on
which the first regular periodic payment
will be due, a creditor must treat the
maximum interest rate that could apply
at any time during that five-year period
as the interest rate for the full term of
the loan to determine the annual
percentage rate for purposes of
§ 1026.43(e)(2)(vi), regardless of whether
the maximum interest rate is reached at
the first or subsequent adjustment
during the five-year period. For
additional instruction on how to
determine the maximum interest rate
during the first five years after the date
on which the first regular periodic
payment will be due. See comments
43(e)(2)(iv)–3 and –4.
iv. Treatment of the maximum
interest rate in determining the annual
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percentage rate. For a loan for which the
interest rate may or will change within
the first five years after the date on
which the first regular periodic payment
will be due, the creditor must determine
the annual percentage rate for purposes
of § 1026.43(e)(2)(vi) by treating the
maximum interest rate that may apply
within the first five years as the interest
rate for the full term of the loan. For
example, assume an adjustable-rate
mortgage with a loan term of 30 years
and an initial discounted rate of 5.0
percent that is fixed for the first three
years. Assume that the maximum
interest rate during the first five years
after the date on which the first regular
periodic payment will be due is 7.0
percent. Pursuant to § 1026.43(e)(2)(vi),
the creditor must determine the annual
percentage rate based on an interest rate
of 7.0 percent applied for the full 30year loan term.
*
*
*
*
*
43(e)(4) Qualified Mortgage Defined—
Other Agencies
1. General. The Department of
Housing and Urban Development,
Department of Veterans Affairs, and the
Department of Agriculture have
promulgated definitions for qualified
mortgages under mortgage programs
they insure, guarantee, or provide under
applicable law. Cross-references to those
definitions are listed in § 1026.43(e)(4)
to acknowledge the covered transactions
covered by those definitions are
qualified mortgages for purposes of this
section.
2. Mortgages originated prior to
[effective date of final rule]. Covered
transactions that met the requirements
of § 1026.43(e)(2)(i) thorough (iii), were
eligible for purchase or guarantee by the
Federal National Mortgage Association
(Fannie Mae) or the Federal Home Loan
Mortgage Corporation (Freddie Mac) (or
any limited-life regulatory entity
succeeding the charter of either)
operating under the conservatorship or
receivership of the Federal Housing
Finance Agency pursuant to section
1367 of the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992 (12 U.S.C. 4617), and were
consummated prior to [effective date of
final rule] continue to be qualified
mortgages for the purposes of this
section.
3. [RESERVED].
4. [RESERVED].
5. [RESERVED].
Paragraph 43(e)(5)
1. Satisfaction of qualified mortgage
requirements. For a covered transaction
to be a qualified mortgage under
§ 1026.43(e)(5), the mortgage must
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satisfy the requirements for a qualified
mortgage under § 1026.43(e)(2), other
than the requirements in
§ 1026.43(e)(2)(v) and (vi). For example,
a qualified mortgage under
§ 1026.43(e)(5) may not have a loan term
in excess of 30 years because longer
terms are prohibited for qualified
mortgages under § 1026.43(e)(2)(ii).
Similarly, a qualified mortgage under
§ 1026.43(e)(5) may not result in a
balloon payment because
§ 1026.43(e)(2)(i)(C) provides that
qualified mortgages may not have
balloon payments except as provided
under § 1026.43(f). However, a covered
transaction need not comply with
§ 1026.43(e)(2)(v) and (vi).
2. Debt-to-income ratio or residual
income. Section 1026.43(e)(5) does not
prescribe a specific monthly debt-toincome ratio with which creditors must
comply. Instead, creditors must
consider a consumer’s debt-to-income
ratio or residual income calculated
generally in accordance with
§ 1026.43(c)(7) and verify the
information used to calculate the debtto-income ratio or residual income in
accordance with § 1026.43(c)(3) and (4).
However, § 1026.43(c)(7) refers creditors
to § 1026.43(c)(5) for instructions on
calculating the payment on the covered
transaction. Section 1026.43(c)(5)
requires creditors to calculate the
payment differently than
§ 1026.43(e)(2)(iv). For purposes of the
qualified mortgage definition in
§ 1026.43(e)(5), creditors must base their
calculation of the consumer’s debt-toincome ratio or residual income on the
payment on the covered transaction
calculated according to
§ 1026.43(e)(2)(iv) instead of according
to § 1026.43(c)(5).
3. Forward commitments. A creditor
may make a mortgage loan that will be
transferred or sold to a purchaser
pursuant to an agreement that has been
entered into at or before the time the
transaction is consummated. Such an
agreement is sometimes known as a
‘‘forward commitment.’’ A mortgage that
will be acquired by a purchaser
pursuant to a forward commitment does
not satisfy the requirements of
§ 1026.43(e)(5), whether the forward
commitment provides for the purchase
and sale of the specific transaction or for
the purchase and sale of transactions
with certain prescribed criteria that the
transaction meets. However, a forward
commitment to another person that also
meets the requirements of
§ 1026.43(e)(5)(i)(D) is permitted. For
example, assume a creditor that is
eligible to make qualified mortgages
under § 1026.43(e)(5) makes a mortgage.
If that mortgage meets the purchase
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criteria of an investor with which the
creditor has an agreement to sell loans
after consummation, then the loan does
not meet the definition of a qualified
mortgage under § 1026.43(e)(5).
However, if the investor meets the
requirements of § 1026.43(e)(5)(i)(D), the
mortgage will be a qualified mortgage if
all other applicable criteria also are
satisfied.
4. Creditor qualifications. To be
eligible to make qualified mortgages
under § 1026.43(e)(5), a creditor must
satisfy the requirements stated in
§ 1026.35(b)(2)(iii)(B) and (C). Section
1026.35(b)(2)(iii)(B) requires that,
during the preceding calendar year, or,
if the application for the transaction was
received before April 1 of the current
calendar year, during either of the two
preceding calendar years, the creditor
and its affiliates together extended no
more than 2,000 covered transactions, as
defined by § 1026.43(b)(1), secured by
first liens, that were sold, assigned, or
otherwise transferred to another person,
or that were subject at the time of
consummation to a commitment to be
acquired by another person. Section
1026.35(b)(2)(iii)(C) requires that, as of
the preceding December 31st, or, if the
application for the transaction was
received before April 1 of the current
calendar year, as of either of the two
preceding December 31sts, the creditor
and its affiliates that regularly extended,
during the applicable period, covered
transactions, as defined by
§ 1026.43(b)(1), secured by first liens,
together, had total assets of less than $2
billion, adjusted annually by the Bureau
for inflation.
5. Requirement to hold in portfolio.
Creditors generally must hold a loan in
portfolio to maintain the transaction’s
status as a qualified mortgage under
§ 1026.43(e)(5), subject to four
exceptions. Unless one of these
exceptions applies, a loan is no longer
a qualified mortgage under
§ 1026.43(e)(5) once legal title to the
debt obligation is sold, assigned, or
otherwise transferred to another person.
Accordingly, unless one of the
exceptions applies, the transferee could
not benefit from the presumption of
compliance for qualified mortgages
under § 1026.43(e)(1) unless the loan
also met the requirements of another
qualified mortgage definition.
6. Application to subsequent
transferees. The exceptions contained in
§ 1026.43(e)(5)(ii) apply not only to an
initial sale, assignment, or other transfer
by the originating creditor but to
subsequent sales, assignments, and
other transfers as well. For example,
assume Creditor A originates a qualified
mortgage under § 1026.43(e)(5). Six
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months after consummation, Creditor A
sells the qualified mortgage to Creditor
B pursuant to § 1026.43(e)(5)(ii)(B) and
the loan retains its qualified mortgage
status because Creditor B complies with
the limits on asset size and number of
transactions. If Creditor B sells the
qualified mortgage, it will lose its
qualified mortgage status under
§ 1026.43(e)(5) unless the sale qualifies
for one of the § 1026.43(e)(5)(ii)
exceptions for sales three or more years
after consummation, to another
qualifying institution, as required by
supervisory action, or pursuant to a
merger or acquisition.
7. Transfer three years after
consummation. Under
§ 1026.43(e)(5)(ii)(A), if a qualified
mortgage under § 1026.43(e)(5) is sold,
assigned, or otherwise transferred three
years or more after consummation, the
loan retains its status as a qualified
mortgage under § 1026.43(e)(5)
following the transfer. The transferee
need not be eligible to originate
qualified mortgages under
§ 1026.43(e)(5). The loan will continue
to be a qualified mortgage throughout its
life, and the transferee, and any
subsequent transferees, may invoke the
presumption of compliance for qualified
mortgages under § 1026.43(e)(1).
8. Transfer to another qualifying
creditor. Under § 1026.43(e)(5)(ii)(B), a
qualified mortgage under § 1026.43(e)(5)
may be sold, assigned, or otherwise
transferred at any time to another
creditor that meets the requirements of
§ 1026.43(e)(5)(i)(D). That section
requires that a creditor together with all
its affiliates, extended no more than
2,000 first-lien covered transactions that
were sold, assigned, or otherwise
transferred by the creditor or its
affiliates to another person, or that were
subject at the time of consummation to
a commitment to be acquired by another
person; and have, together with its
affiliates that regularly extended
covered transactions secured by first
liens, total assets less than $2 billion (as
adjusted for inflation). These tests are
assessed based on transactions and
assets from the calendar year preceding
the current calendar year or from either
of the two calendar years preceding the
current calendar year if the application
for the transaction was received before
April 1 of the current calendar year. A
qualified mortgage under § 1026.43(e)(5)
transferred to a creditor that meets these
criteria would retain its qualified
mortgage status even if it is transferred
less than three years after
consummation.
9. Supervisory sales. Section
1026.43(e)(5)(ii)(C) facilitates sales that
are deemed necessary by supervisory
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41777
agencies to revive troubled creditors and
resolve failed creditors. A qualified
mortgage under § 1026.43(e)(5) retains
its qualified mortgage status if it is sold,
assigned, or otherwise transferred to
another person pursuant to: A capital
restoration plan or other action under 12
U.S.C. 1831o; the actions or instructions
of any person acting as conservator,
receiver or bankruptcy trustee; an order
of a State or Federal government agency
with jurisdiction to examine the creditor
pursuant to State or Federal law; or an
agreement between the creditor and
such an agency. A qualified mortgage
under § 1026.43(e)(5) that is sold,
assigned, or otherwise transferred under
these circumstances retains its qualified
mortgage status regardless of how long
after consummation it is sold and
regardless of the size or other
characteristics of the transferee. Section
1026.43(e)(5)(ii)(C) does not apply to
transfers done to comply with a
generally applicable regulation with
future effect designed to implement,
interpret, or prescribe law or policy in
the absence of a specific order by or a
specific agreement with a governmental
agency described in
§ 1026.43(e)(5)(ii)(C) directing the sale
of one or more qualified mortgages
under § 1026.43(e)(5) held by the
creditor or one of the other
circumstances listed in
§ 1026.43(e)(5)(ii)(C). For example, a
qualified mortgage under § 1026.43(e)(5)
that is sold pursuant to a capital
restoration plan under 12 U.S.C. 1831o
would retain its status as a qualified
mortgage following the sale. However, if
the creditor simply chose to sell the
same qualified mortgage as one way to
comply with general regulatory capital
requirements in the absence of
supervisory action or agreement it
would lose its status as a qualified
mortgage following the sale unless it
qualifies under another definition of
qualified mortgage.
10. Mergers and acquisitions. A
qualified mortgage under § 1026.43(e)(5)
retains its qualified mortgage status if a
creditor merges with, is acquired by, or
acquires another person regardless of
whether the creditor or its successor is
eligible to originate new qualified
mortgages under § 1026.43(e)(5) after the
merger or acquisition. However, the
creditor or its successor can originate
new qualified mortgages under
§ 1026.43(e)(5) only if it complies with
all of the requirements of § 1026.43(e)(5)
after the merger or acquisition. For
example, assume a creditor that
originates 250 covered transactions each
year and originates qualified mortgages
under § 1026.43(e)(5) is acquired by a
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larger creditor that originates 10,000
covered transactions each year.
Following the acquisition, the small
creditor would no longer be able to
originate § 1026.43(e)(5) qualified
mortgages because, together with its
affiliates, it would originate more than
500 covered transactions each year.
However, the § 1026.43(e)(5) qualified
mortgages originated by the small
creditor before the acquisition would
retain their qualified mortgage status.
*
*
*
*
*
Paragraph 43(f)(1)(i)
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1. Satisfaction of qualified mortgage
requirements. Under § 1026.43(f)(1)(i),
for a mortgage that provides for a
balloon payment to be a qualified
mortgage, the mortgage must satisfy the
requirements for a qualified mortgage in
paragraphs (e)(2)(i)(A), (e)(2)(ii), and
(e)(2)(iii). Therefore, a covered
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transaction with balloon payment terms
must provide for regular periodic
payments that do not result in an
increase of the principal balance,
pursuant to § 1026.43(e)(2)(i)(A); must
have a loan term that does not exceed
30 years, pursuant to § 1026.43(e)(2)(ii);
and must have total points and fees that
do not exceed specified thresholds
pursuant to § 1026.43(e)(2)(iii).
*
*
*
*
*
Paragraph 43(f)(1)(iii)
1. Debt-to-income or residual income.
A creditor must consider and verify the
consumer’s monthly debt-to-income
ratio or residual income to meet the
requirements of § 1026.43(f)(1)(iii)(C).
To calculate the consumer’s monthly
debt-to-income or residual income for
purposes of § 1026.43(f)(1)(iii)(C), the
creditor may rely on the definitions and
calculation rules in § 1026.43(c)(7) and
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its accompanying commentary, except
for the calculation rules for a
consumer’s total monthly debt
obligations (which is a component of
debt-to-income and residual income
under § 1026.43(c)(7)). For purposes of
calculating the consumer’s total
monthly debt obligations under
§ 1026.43(f)(1)(iii), the creditor must
calculate the monthly payment on the
covered transaction using the payment
calculation rules in
§ 1026.43(f)(1)(iv)(A), together with all
mortgage-related obligations and
excluding the balloon payment.
*
*
*
*
*
Dated: June 22, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer
Financial Protection.
[FR Doc. 2020–13739 Filed 7–9–20; 8:45 am]
BILLING CODE 4810–AM–P
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[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Proposed Rules]
[Pages 41716-41778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13739]
[[Page 41715]]
Vol. 85
Friday,
No. 133
July 10, 2020
Part III
Bureau of Consumer Financial Protection
-----------------------------------------------------------------------
12 CFR Part 1026
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): General QM Loan Definition; Proposed Rule
Federal Register / Vol. 85 , No. 133 / Friday, July 10, 2020 /
Proposed Rules
[[Page 41716]]
-----------------------------------------------------------------------
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2020-0020]
RIN 3170-AA98
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z): General QM Loan Definition
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
-----------------------------------------------------------------------
SUMMARY: With certain exceptions, Regulation Z requires creditors to
make a reasonable, good faith determination of a consumer's ability to
repay any residential mortgage loan, and loans that meet Regulation Z's
requirements for ``qualified mortgages'' (QMs) obtain certain
protections from liability. One category of QMs is the General QM loan
category. For General QM loans, the ratio of the consumer's total
monthly debt to total monthly income (DTI ratio) must not exceed 43
percent. In this notice of proposed rulemaking, the Bureau proposes
certain amendments to the General QM loan definition in Regulation Z.
Among other things, the Bureau proposes to remove the General QM loan
definition's 43 percent DTI limit and replace it with a price-based
threshold. Another category of QMs is loans that are eligible for
purchase or guarantee by either the Federal National Mortgage
Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation
(Freddie Mac) (government-sponsored enterprises, or GSEs), while
operating under the conservatorship or receivership of the Federal
Housing Finance Agency (FHFA). The GSEs are currently under Federal
conservatorship. The Bureau established this category of QMs (Temporary
GSE QM loans) as a temporary measure that is set to expire no later
than January 10, 2021 or when the GSEs exit conservatorship. In a
separate proposal released simultaneously with this proposal, the
Bureau proposes to extend the Temporary GSE QM loan definition to
expire upon the effective date of final amendments to the General QM
loan definition in Regulation Z (or when the GSEs cease to operate
under the conservatorship of the FHFA, if that happens earlier). In
this present proposed rule, the Bureau proposes the amendments to the
General QM loan definition that are referenced in that separate
proposal. The Bureau's objective with these proposals is to facilitate
a smooth and orderly transition away from the Temporary GSE QM loan
definition and to ensure access to responsible, affordable mortgage
credit upon its expiration.
DATES: Comments must be received on or before September 8, 2020.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2020-
0020 or RIN 3170-AA98, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket
No. CFPB-2020-0020 or RIN 3170-AA98 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--General QM
Amendments, Bureau of Consumer Financial Protection, 1700 G Street NW,
Washington, DC 20552. Please note that due to circumstances associated
with the COVID-19 pandemic, the Bureau discourages the submission of
comments by mail, hand delivery, or courier.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to https://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-9169.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Benjamin Cady or Waeiz Syed, Counsels,
or Sarita Frattaroli, David Friend, Joan Kayagil, Mark Morelli, Amanda
Quester, Alexa Reimelt, Marta Tanenhaus, Priscilla Walton-Fein, or
Steven Wrone, Senior Counsels, Office of Regulations, at 202-435-7700.
If you require this document in an alternative electronic format,
please contact [email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule or Rule)
requires a creditor to make a reasonable, good faith determination of a
consumer's ability to repay a residential mortgage loan according to
its terms. Loans that meet the Rule's requirements for qualified
mortgages (QMs) obtain certain protections from liability. The Rule
defines several categories of QMs.
One QM category defined in the Rule is the General QM loan
category. General QM loans must comply with the Rule's prohibitions on
certain loan features, its points-and-fees limits, and its underwriting
requirements. For General QM loans, the ratio of the consumer's total
monthly debt to total monthly income (DTI) ratio must not exceed 43
percent. The Rule requires that creditors must calculate, consider, and
verify debt and income for purposes of determining the consumer's DTI
ratio using the standards contained in appendix Q of Regulation Z.
A second, temporary category of QM loans defined in the Rule
consists of mortgages that (1) comply with the same loan-feature
prohibitions and points-and-fees limits as General QM loans and (2) are
eligible to be purchased or guaranteed by the GSEs while under the
conservatorship of the FHFA. This proposal refers to these loans as
Temporary GSE QM loans, and the provision that created this loan
category is commonly known as the GSE Patch. Unlike for General QM
loans, the Rule does not prescribe a DTI limit for Temporary GSE QM
loans. Thus, a loan can qualify as a Temporary GSE QM loan even if the
consumer's DTI ratio exceeds 43 percent, so long as the loan is
eligible to be purchased or guaranteed by either of the GSEs. In
addition, for Temporary GSE QM loans, the Rule does not require
creditors to use appendix Q to determine the consumer's income, debt,
or DTI ratio.
Under the Rule, the Temporary GSE QM loan definition expires with
respect to each GSE when that GSE exits conservatorship or on January
10, 2021, whichever comes first. The GSEs are currently in
conservatorship. Despite the Bureau's expectations when the Rule was
published in 2013, Temporary GSE QM loan originations continue to
represent a large and persistent share of the residential mortgage loan
market. A significant number of Temporary GSE
[[Page 41717]]
QM loans would not qualify as General QM loans under the current
regulations after the Temporary GSE QM loan definition expires. These
loans would not qualify as General QM loans either because the
consumer's DTI ratio is above 43 percent or because the creditor's
method of documenting and verifying income or debt does not comply with
appendix Q. Although alternative loan options, including some other
types of QM loans, would still be available to many consumers who could
not qualify for General QM loans, the Bureau's analysis of available
data indicates that many loans that are currently Temporary GSE QM
loans would cost materially more for consumers and many would not be
made at all.
In a separate proposal (Extension Proposal) released simultaneously
with this proposal, the Bureau proposes to extend the Temporary GSE QM
loan definition to expire upon the effective date of final amendments
to the General QM loan definition or when the GSEs exit
conservatorship, whichever comes first. In this proposal, the Bureau
proposes the amendments to the General QM loan definition that are
referenced in the Extension Proposal.
The Bureau is issuing this proposal to amend the General QM loan
definition because it is concerned that retaining the existing General
QM loan definition with the 43 percent DTI limit after the Temporary
GSE QM loan definition expires would significantly reduce the size of
QM and could significantly reduce access to responsible, affordable
credit. The Bureau is proposing a price-based General QM loan
definition to replace the DTI-based approach because it preliminarily
concludes that a loan's price, as measured by comparing a loan's annual
percentage rate (APR) to the average prime offer rate (APOR) for a
comparable transaction, is a strong indicator of a consumer's ability
to repay and is a more holistic and flexible measure of a consumer's
ability to repay than DTI alone.
Under the proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. The proposal would retain the existing product-feature
and underwriting requirements and limits on points and fees. Although
the proposal would remove the 43 percent DTI limit from the General QM
loan definition, the proposal would require that the creditor consider
the consumer's income or assets, debt obligations, and DTI ratio or
residual income and verify the consumer's current or reasonably
expected income or assets other than the value of the dwelling
(including any real property attached to the dwelling) that secures the
loan and the consumer's current debt obligations, alimony, and child
support. The proposal would remove appendix Q. To prevent uncertainty
that may result from appendix Q's removal, the proposal would clarify
the requirements to consider and verify a consumer's income, assets,
debt obligations, alimony, and child support. The proposal would
preserve the current threshold separating safe harbor from rebuttable
presumption QMs, under which a loan is a safe harbor QM if its APR
exceeds APOR for a comparable transaction by less than 1.5 percentage
points as of the date the interest rate is set (or by less than 3.5
percentage points for subordinate-lien transactions).
The Bureau is proposing a price-based approach to replace the
specific DTI limit because it is concerned that imposing a DTI limit as
a condition for QM status under the General QM loan definition may be
overly burdensome and complex in practice and may unduly restrict
access to credit because it provides an incomplete picture of the
consumer's financial capacity. In particular, the Bureau is concerned
that conditioning QM status on a specific DTI limit may impair access
to responsible, affordable credit for some consumers for whom it might
be appropriate to presume ability to repay for their loans at
consummation. For the reasons set forth below, the Bureau preliminarily
concludes that a price-based General QM loan definition is appropriate
because a loan's price, as measured by comparing a loan's APR to APOR
for a comparable transaction, is a strong indicator of a consumer's
ability to repay and is a more holistic and flexible measure of a
consumer's ability to repay than DTI alone.
In addition, although the Bureau is proposing to remove the 43
percent DTI limit and adopt a price-based approach for the General QM
loan definition, the Bureau requests 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.
The Bureau proposes that the effective date of a final rule
relating to this proposal would be six months after publication in the
Federal Register. The revised regulations would apply to covered
transactions for which creditors receive an application on or after
this effective date. The Bureau tentatively determines that a six-month
period between Federal Register publication of a final rule and the
final rule's effective date would give creditors enough time to bring
their systems into compliance with the revised regulations. The Bureau
does not intend to issue a final rule amending the General QM loan
definition early enough for it to take effect before April 1, 2021. The
Bureau requests comment on this proposed effective date. The Bureau
specifically seeks comment on whether there is a day of the week or
time of month that would most facilitate implementation of the proposed
changes.
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) amended the Truth in Lending Act (TILA) to establish,
among other things, ability-to-repay (ATR) requirements in connection
with the origination of most residential mortgage loans.\1\ 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.'' \2\ 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.\3\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, sections 1411-12, 1414, 124 Stat. 1376 (2010);
15 U.S.C. 1639c.
\2\ 15 U.S.C. 1639b(a)(2).
\3\ 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
[[Page 41718]]
resources other than equity in the dwelling or real property that
secures repayment of the loan.\4\ A creditor, however, may not be
certain whether its ATR determination is reasonable in a particular
case, and it risks liability if a court or an agency, including the
Bureau, later concludes that the ATR determination was not reasonable.
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\4\ 15 U.S.C. 1639c(a)(3).
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TILA addresses this uncertainty by defining a category of loans--
called QMs--for which a creditor ``may presume that the loan has met''
the ATR requirements.\5\ The statute generally defines a QM to mean any
residential mortgage loan for which:
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\5\ 15 U.S.C. 1639c(b)(1).
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There is no negative amortization, interest-only payments,
or balloon payments;
The loan term does not exceed 30 years;
The total points and fees generally do not exceed 3
percent of the loan amount;
The income and assets relied upon for repayment are
verified and documented;
The underwriting uses a monthly payment based on the
maximum rate during the first five years, uses a payment schedule that
fully amortizes the loan over the loan term, and takes into account all
mortgage-related obligations; and
The loan complies with any guidelines or regulations
established by the Bureau relating to the ratio of total monthly debt
to monthly income or alternative measures of ability to pay regular
expenses after payment of total monthly debt.\6\
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\6\ 15 U.S.C. 1639c(b)(2)(A).
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B. The Ability-to-Repay/Qualified Mortgage Rule
In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\7\
The January 2013 Final Rule became effective on January 10, 2014, and
the Bureau amended it several times through 2016.\8\ This proposal
refers to the January 2013 Final Rule and later amendments to it
collectively as the Ability-to-Repay/Qualified Mortgage Rule, the ATR/
QM Rule, or the Rule. The ATR/QM Rule implements the statutory ATR
provisions discussed above and defines several categories of QM
loans.\9\
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\7\ 78 FR 6408 (Jan. 30, 2013).
\8\ 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).
\9\ 12 CFR 1026.43(c), (e).
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1. General QM Loans
One category of QM loans defined by the Rule consists of ``General
QM loans.'' \10\ A loan is a General QM loan if:
---------------------------------------------------------------------------
\10\ 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 five percent of the credit risk of the
assets collateralizing the ABS. 15 U.S.C. 78o-11. Six Federal
agencies (not including the Bureau) are tasked with implementing
this requirement. Those agencies are the Board of Governors of the
Federal Reserve System (Board), the Office of the Comptroller of the
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC),
the Securities and Exchange Commission, the FHFA, and the U.S.
Department of Housing and Urban Development (HUD) (collectively, the
QRM agencies). Section 15G of the Securities Exchange Act of 1934
provides that the credit risk retention requirements shall not apply
to an issuance of ABS if all of the assets that collateralize the
ABS are QRMs. See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
Section 15G requires the QRM agencies to jointly define what
constitutes a QRM, taking into consideration underwriting and
product features that historical loan performance data indicate
result in a lower risk of default. See 15 U.S.C. 78o-11(e)(4).
Section 15G also provides that the definition of a QRM shall be ``no
broader than'' the definition of a ``qualified mortgage,'' as the
term is defined under TILA section 129C(b)(2), as amended by the
Dodd-Frank Act, and regulations adopted thereunder. 15 U.S.C. 78o-
11(e)(4)(C). In 2014, the QRM agencies issued a final rule adopting
the risk retention requirements. 79 FR 77601 (Dec. 24, 2014). 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. 84 FR 70073 (Dec. 20,
2019). Among other things, the review allows the QRM agencies to
consider the QRM definition in light of any changes to the QM
definition adopted by the Bureau.
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The loan does not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or
points and fees that exceed specified limits; \11\
---------------------------------------------------------------------------
\11\ 12 CFR 1026.43(e)(2)(i)-(iii).
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The creditor underwrites the loan based on a fully
amortizing schedule using the maximum rate permitted during the first
five years; \12\
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\12\ 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; \13\ and
---------------------------------------------------------------------------
\13\ 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.\14\
---------------------------------------------------------------------------
\14\ 12 CFR 1026.43(e)(2)(vi).
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Appendix Q contains standards for calculating and verifying debt
and income for purposes of determining whether a mortgage satisfies the
43 percent DTI limit for General QM loans. The standards in appendix Q
were adapted from guidelines maintained by the Federal Housing
Administration (FHA) of HUD when the January 2013 Final Rule was
issued.\15\ 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.\16\
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\15\ 78 FR 6408, 6527-28 (Jan. 30, 2013) (noting that appendix Q
incorporates, with certain modifications, the definitions and
standards in HUD Handbook 4155.1, Mortgage Credit Analysis for
Mortgage Insurance on One-to-Four-Unit Mortgage Loans).
\16\ 12 CFR 1026, appendix Q.
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2. Temporary GSE QM Loans
A second, temporary category of QM loans defined by the Rule,
Temporary GSE QM loans, consists of mortgages that (1) comply with the
Rule's prohibitions on certain loan features, its underwriting
requirements, and its limitations on points and fees; \17\ and (2) are
eligible to be purchased or guaranteed by either GSE while under the
conservatorship of the FHFA.\18\ Unlike for General QM loans,
Regulation Z does not prescribe a DTI limit for Temporary GSE QM loans.
Thus, a loan can qualify as a Temporary GSE QM loan even if the DTI
ratio exceeds 43 percent, as long as the DTI ratio meets the applicable
GSE's DTI requirements and other underwriting criteria. In addition,
income and debt for such loans, and DTI ratios, generally are verified
and calculated using GSE standards, rather than appendix Q. The
Temporary GSE QM loan category--also known as the GSE Patch--is
scheduled to expire with respect to each GSE when that GSE exits
conservatorship or on January 10, 2021, whichever comes first.\19\
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\17\ 12 CFR 1026.43(e)(2)(i) through (iii).
\18\ 12 CFR 1026.43(e)(4).
\19\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QM loans. The first additional
category consisted of mortgages eligible to be insured or guaranteed
(as applicable) by HUD (FHA loans), the U.S. Department of Veterans
Affairs (VA loans), the U.S. Department of Agriculture (USDA loans),
and the Rural Housing Service (RHS loans). 12 CFR
1026.43(e)(4)(ii)(B)-(E). This temporary category of QM loans no
longer exists because the relevant Federal agencies have since
issued their own QM rules. See, e.g., 24 CFR 203.19 (HUD rule).
Other categories of QM loans provide more flexible standards for
certain loans originated by certain small creditors. 12 CFR
1026.43(e)(5), (f); cf. 12 CFR 1026.43(e)(6) (applicable only to
covered transactions for which the application was received before
April 1, 2016).
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[[Page 41719]]
In the January 2013 Final Rule, the Bureau explained why it created
the Temporary GSE QM loan category. The Bureau observed that it did not
believe that a 43 percent DTI ratio ``represents the outer boundary of
responsible lending'' and acknowledged that historically, and even
after the financial crisis, over 20 percent of mortgages exceeded that
threshold.\20\ The Bureau believed, however, that, as DTI ratios
increase, ``the general ability-to-repay procedures, rather than the
qualified mortgage framework, is better suited for consideration of all
relevant factors that go to a consumer's ability to repay a mortgage
loan'' and that ``[o]ver the long term . . . there will be a robust and
sizable market for prudent loans beyond the 43 percent threshold even
without the benefit of the presumption of compliance that applies to
qualified mortgages.'' \21\
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\20\ 78 FR 6408, 6527 (Jan. 30, 2013).
\21\ Id. at 6527-28.
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At the same time, the Bureau noted that the mortgage market was
especially fragile following the financial crisis, and GSE-eligible
loans and federally insured or guaranteed loans made up a significant
majority of the market.\22\ The Bureau believed that it was appropriate
to consider for a period of time that GSE-eligible loans were
originated with an appropriate assessment of the consumer's ability to
repay and therefore warranted being treated as QMs.\23\ The Bureau
believed in 2013 that this temporary category of QM loans would, in the
near term, help to ensure access to responsible, affordable credit for
consumers with DTI ratios above 43 percent, as well as facilitate
compliance by creditors by promoting the use of widely recognized,
federally related underwriting standards.\24\
---------------------------------------------------------------------------
\22\ Id. at 6533-34.
\23\ Id. at 6534.
\24\ Id. at 6533.
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In making the Temporary GSE QM loan definition temporary, the
Bureau sought to ``provide an adequate period for economic, market, and
regulatory conditions to stabilize'' and ``a reasonable transition
period to the general qualified mortgage definition.'' \25\ The Bureau
believed that the Temporary GSE QM loan definition would benefit
consumers by preserving access to credit while the mortgage industry
adjusted to the ATR/QM Rule.\26\ The Bureau also explained that it
structured the Temporary GSE QM loan definition to cover loans eligible
to be purchased or guaranteed by either of the GSEs--regardless of
whether the loans are actually purchased or guaranteed--to leave room
for non-GSE private investors to return to the market and secure the
same legal protections as the GSEs.\27\ The Bureau believed that, as
the market recovered, the GSEs and the Federal agencies would be able
to reduce their market presence, the percentage of Temporary GSE QM
loans would decrease, and the market would shift toward General QM
loans and non-QM loans above a 43 percent DTI ratio.\28\ The Bureau's
view was that a shift towards non-QM loans could be supported by the
non-GSE private market--i.e., by institutions holding such loans in
portfolio, selling them in whole, or securitizing them in a rejuvenated
private-label securities (PLS) market. The Bureau noted that, pursuant
to its statutory obligations under the Dodd-Frank Act, it would assess
the impact of the ATR/QM Rule five years after the Rule's effective
date, and the assessment would provide an opportunity to analyze the
Temporary GSE QM loan definition.\29\
---------------------------------------------------------------------------
\25\ Id. at 6534.
\26\ Id. at 6536.
\27\ Id. at 6534.
\28\ Id.
\29\ Id.
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3. Presumption of Compliance for QM Loans
In the January 2013 Final Rule, the Bureau considered whether QM
loans should receive a conclusive presumption (i.e., a safe harbor) or
a rebuttable presumption of compliance with the ATR requirements. The
Bureau concluded that the statute is ambiguous as to whether a creditor
originating a QM loan receives a safe harbor or a rebuttable
presumption that it has complied with the ATR requirements.\30\ The
Bureau noted that its analysis of the statutory construction and policy
implications demonstrated that there are sound reasons for adopting
either interpretation.\31\ The Bureau concluded that the statutory
language does not mandate either interpretation and that the
presumptions should be tailored to promote the policy goals of the
statute.\32\ 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.'' \33\
---------------------------------------------------------------------------
\30\ Id. at 6511.
\31\ Id. at 6507.
\32\ Id. at 6511.
\33\ Id. at 6514.
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Under the Rule, a creditor that makes a QM loan is protected from
liability presumptively or conclusively, depending on whether the loan
is ``higher priced.'' The Rule generally defines a ``higher-priced''
loan to mean a first-lien mortgage with an APR that exceeded APOR for a
comparable transaction as of the date the interest rate was set by 1.5
or more percentage points; or a subordinate-lien mortgage with an APR
that exceeded APOR for a comparable transaction as of the date the
interest rate was set by 3.5 or more percentage points.\34\ A creditor
that makes a QM loan that is not ``higher priced'' is entitled to a
conclusive presumption that it has complied with the Rule--i.e., the
creditor receives a safe harbor from liability.\35\ A creditor that
makes a loan that meets the standards for a QM loan but is ``higher
priced'' is entitled to a rebuttable presumption that it has complied
with the Rule.\36\
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\34\ 12 CFR 1026.43(b)(4).
\35\ 12 CFR 1026.43(e)(1)(i).
\36\ 12 CFR 1026.43(e)(1)(ii).
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The Bureau explained in the January 2013 Final Rule why it was
adopting different presumptions of compliance based on the pricing of
QMs.\37\ The Bureau noted that the line it was drawing is one that has
long been recognized as a rule of thumb to separate prime loans from
subprime loans.\38\ The Bureau noted that loan pricing is calibrated to
the risk of the loan and that the historical performance of prime and
subprime loans indicates greater risk for subprime loans.\39\ The
Bureau also noted that consumers taking out subprime loans tend to be
less sophisticated and have fewer options and that the most abuses
prior to the financial crisis occurred in the subprime market.\40\ The
Bureau concluded that these factors warrant imposing heightened
standards for higher-priced loans.\41\ For prime loans, however, the
Bureau found that lower rates are indicative of ability to repay and
noted that prime loans have performed significantly better than
subprime loans.\42\ The Bureau concluded that if a loan met the product
and underwriting requirements for QM and was not a higher-priced loan,
there are sufficient grounds for concluding that the creditor satisfied
the ATR requirements.\43\ The Bureau noted that the conclusive
presumption may reduce uncertainty and litigation risk and may promote
enhanced competition in the prime
[[Page 41720]]
market.\44\ The Bureau also noted that the litigation risk for
rebuttable presumption QMs likely would be quite modest and would have
a limited impact on access to credit.\45\
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\37\ 78 FR 6408 at 6506, 6510-14.
\38\ Id. at 6408.
\39\ Id. at 6511.
\40\ Id.
\41\ Id.
\42\ Id.
\43\ Id.
\44\ Id.
\45\ Id. at 6511-12.
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The Bureau also noted in the January 2013 Final Rule that
policymakers have long relied on pricing to determine which loans
should be subject to additional regulatory requirements.\46\ That
history of reliance on pricing continues to provide support for a
price-based approach to the General QM loan definition. For example, in
1994 Congress amended TILA by enacting the Home Ownership and Equity
Protection Act (HOEPA) as part of the Riegle Community Development and
Regulatory Improvement Act of 1994.\47\ HOEPA was enacted as an
amendment to TILA to address abusive practices in refinancing and home-
equity mortgage loans with high interest rates or high fees.\48\ The
statute applied generally to closed-end mortgage credit but excluded
purchase money mortgage loans and reverse mortgages. Coverage was
triggered if a loan's APR exceeded comparable Treasury securities by
specified thresholds for particular loan types, or if points and fees
exceeded eight percent of the total loan amount or a dollar
threshold.\49\ For high-cost loans meeting either of those thresholds,
HOEPA required creditors to provide special pre-closing disclosures,
restricted prepayment penalties and certain other loan terms, and
regulated various creditor practices, such as extending credit without
regard to a consumer's ability to repay the loan. HOEPA also created
special substantive protections for high-cost mortgages, such as
prohibiting a creditor from engaging in a pattern or practice of
extending a high-cost mortgage to a consumer based on the consumer's
collateral without regard to the consumer's repayment ability,
including the consumer's current and expected income, current
obligations, and employment.\50\ The Board implemented the HOEPA
amendments at Sec. Sec. 226.31, 226.32, and 226.33 \51\ of Regulation
Z.\52\
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\46\ Id. at 6413-14, 6510-11.
\47\ Riegle Community Development and Regulatory Improvement
Act, Public Law 103-325, 108 Stat. 2160 (1994).
\48\ As originally enacted, HOEPA defined a class of ``high-cost
mortgages,'' which were generally closed-end home-equity loans
(excluding home-purchase loans) with APRs or total points and fees
exceeding prescribed thresholds. Mortgages covered by HOEPA have
been referred to as ``HOEPA loans,'' ``Section 32 loans,'' or
``high-cost mortgages.''
\49\ The Dodd-Frank Act adjusted the baseline for the APR
comparison, lowered the points-and-fees threshold, and added a
prepayment trigger.
\50\ TILA section 129(h); 15 U.S.C. 1639(h). In addition to the
disclosures and limitations specified in the statute, HOEPA expanded
the Board's rulemaking authority, among other things, to prohibit
acts or practices the Board found to be unfair and deceptive in
connection with mortgage loans.
\51\ Subsequently renumbered as sections 1026.31, 1026.32, and
1026.33 of Regulation Z.
\52\ See 60 FR 15463 (Mar. 24, 1995).
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In 2001, the Board issued rules expanding HOEPA's protections to
more loans by revising the APR threshold for first-lien mortgage loans
and revising the ATR provisions to provide for a presumption of a
violation of the rule if the creditor engages in a pattern or practice
of making high-cost mortgages without verifying and documenting the
consumer's repayment ability.
In 2008, the Board exercised its authority under HOEPA to extend
certain consumer protections concerning a consumer's ability to repay
and prepayment penalties to a new category of ``higher-priced mortgage
loans'' (HPMLs) \53\ with APRs that are lower than those prescribed for
high-cost loans but that nevertheless exceed the APOR by prescribed
amounts. This new category of loans was designed to include subprime
credit, including subprime purchase money mortgage loans. Specifically,
the Board exercised its authority to revise HOEPA's restrictions on
high-cost loans based on a conclusion that the revisions were necessary
to prevent unfair and deceptive acts or practices in connection with
mortgage loans.\54\ The Board concluded that a prohibition on making
individual loans without regard for repayment ability was necessary to
ensure a remedy for consumers who are given unaffordable loans and to
deter irresponsible lending, which injures individual consumers. The
2008 HOEPA Final Rule provided a presumption of compliance with the
higher-priced mortgage ability-to-repay requirements if the creditor
follows certain procedures regarding underwriting the loan payment,
assessing the DTI ratio or residual income, and limiting the features
of the loan, in addition to following certain procedures mandated for
all creditors.\55\ However, the 2008 HOEPA Final Rule made clear that
even if the creditor follows the required and optional criteria, the
creditor obtained a presumption (not a safe harbor) of compliance with
the repayment ability requirement. The consumer therefore could still
rebut or overcome that presumption by showing that, despite following
the required and optional procedures, the creditor nonetheless
disregarded the consumer's ability the loan.
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\53\ Under the Board's 2008 HOEPA Final Rule, a higher-priced
mortgage loan is a consumer credit transaction secured by the
consumer's principal dwelling with an APR that exceeds APOR for a
comparable transaction, as of the date the interest rate is set, by
1.5 or more percentage points for loans secured by a first lien on
the dwelling, or by 3.5 or more percentage points for loans secured
by a subordinate lien on the dwelling. 73 FR 44522 (July 30, 2008)
(2008 HOEPA Final Rule). The definition of a ``higher-priced
mortgage loan'' includes practically all ``high-cost mortgages''
because the latter transactions are determined by higher loan
pricing threshold tests. See 12 CFR 226.35(a)(1).
\54\ 73 FR 44522 (July 30, 2008).
\55\ See 12 CFR 1026.34(a)(4)(iii), (iv).
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C. The Bureau's Assessment of the Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess
each of its significant rules and orders and to publish a report of
each assessment within five years of the effective date of the rule or
order.\56\ In June 2017, the Bureau published a request for information
in connection with its assessment of the ATR/QM Rule (Assessment
RFI).\57\ These comments are summarized in general terms in part III
below.
---------------------------------------------------------------------------
\56\ 12 U.S.C. 5512(d).
\57\ 82 FR 25246 (June 1, 2017).
---------------------------------------------------------------------------
In January 2019, the Bureau published its ATR/QM Rule Assessment
Report.\58\ The Report included findings about the effects of the ATR/
QM Rule on the mortgage market generally, as well as specific findings
about Temporary GSE QM loan originations.
---------------------------------------------------------------------------
\58\ See generally Bureau of Consumer Fin. Prot., Ability to
Repay and Qualified Mortgage Assessment Report (Jan. 2019)
(Assessment Report), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
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The Report found that loans with higher DTI levels have been
associated with higher levels of ``early delinquency'' (i.e.,
delinquency within two years of origination), which can serve as a
proxy for measuring consumer repayment ability at consummation across a
wide pool of loans.\59\ The Report also found that the Rule did not
eliminate access to credit for high-DTI consumers--i.e., consumers with
DTI ratios above 43 percent--who qualify for loans eligible for
purchase or guarantee by either of the GSEs, that is, Temporary GSE QM
loans.\60\ On the other hand, based on application-level data obtained
from nine large lenders, the Report found that the Rule eliminated
between 63 and 70 percent of high-DTI home purchase
[[Page 41721]]
loans that were not Temporary GSE QM loans.\61\
---------------------------------------------------------------------------
\59\ See, e.g., id. at 83-84, 100-05.
\60\ See, e.g., id. at 10, 194-96.
\61\ See, e.g., id. at 10-11, 117, 131-47.
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One main finding about Temporary GSE QM loans was that such loans
continued to represent a ``large and persistent'' share of originations
in the conforming segment of the mortgage market.\62\ As discussed, the
GSEs' share of the conventional, conforming purchase-mortgage market
was large before the ATR/QM Rule, and the Assessment found a small
increase in that share since the Rule's effective date, reaching 71
percent in 2017.\63\ The Assessment Report noted that, at least for
loans intended for sale in the secondary market, creditors generally
offer a Temporary GSE QM loan even when a General QM loan could be
originated.\64\
---------------------------------------------------------------------------
\62\ Id. at 188. Because the Temporary GSE QM loan definition
generally affects only loans that conform to the GSEs' guidelines,
the Assessment Report's discussion of the Temporary GSE QM loan
definition focused on the conforming segment of the market, not on
non-conforming (e.g., jumbo) loans.
\63\ Id. at 191.
\64\ Id. at 192.
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The continued prevalence of Temporary GSE QM loan originations is
contrary to the Bureau's expectation at the time it issued the ATR/QM
Rule in 2013.\65\ The Assessment Report discussed several possible
reasons for the continued prevalence of Temporary GSE QM loan
originations. The Report first highlighted commenters' concerns with
the perceived lack of clarity in appendix Q and found that such
concerns ``may have contributed to investors'--and at least
derivatively, creditors'--preference'' for Temporary GSE QM loans
instead of originating loans under the General QM loan definition.\66\
In addition, the Bureau has not revised appendix Q since 2013, while
other standards for calculating and verifying debt and income have been
updated more frequently.\67\ ANPR commenters also expressed concern
with appendix Q and stated that the Temporary GSE QM loan definition
has benefited creditors and consumers by enabling creditors to
originate QMs without having to use appendix Q.
---------------------------------------------------------------------------
\65\ Id. at 13, 190, 238.
\66\ Id. at 193.
\67\ Id. at 193-94.
---------------------------------------------------------------------------
The Assessment Report noted that a second possible reason for the
continued prevalence of Temporary GSE QM loans is that the GSEs were
able to accommodate the demand for mortgages above the General QM loan
definition's DTI limit of 43 percent as the DTI ratio distribution in
the market shifted upward.\68\ According to the Assessment Report, in
the years since the ATR/QM Rule took effect, house prices have
increased and consumers hold more mortgage and other debt (including
student loan debt), all of which have caused the DTI ratio distribution
to shift upward.\69\ The Assessment Report noted that the share of GSE
home purchase loans with DTI ratios above 43 percent has increased
since the ATR/QM Rule took effect in 2014.\70\ The available data
suggest that such high-DTI lending has declined in the non-GSE market
relative to the GSE market.\71\ The non-GSE market has constricted even
with respect to highly qualified consumers; those with higher incomes
and higher credit scores are representing a greater share of
denials.\72\
---------------------------------------------------------------------------
\68\ Id. at 194.
\69\ Id.
\70\ Id. at 194-95.
\71\ Id. at 119-20.
\72\ Id. at 153.
---------------------------------------------------------------------------
The Assessment Report found that a third possible reason for the
persistence of Temporary GSE QM loans is the structure of the secondary
market.\73\ If creditors adhere to the GSEs' guidelines, they gain
access to a robust, highly liquid secondary market.\74\ In contrast,
while private market securitizations have grown somewhat in recent
years, their volume is still a fraction of their pre-crisis levels.\75\
There were less than $20 billion in new origination PLS issuances in
2017, compared with $1 trillion in 2005,\76\ and only 21 percent of new
origination PLS issuances in 2017 were non-QM issuances.\77\ To the
extent that private securitizations have occurred since the ATR/QM Rule
took effect in 2014, the majority of new origination PLS issuances have
consisted of prime jumbo loans made to consumers with strong credit
characteristics, and these securities have a low share of non-QM
loans.\78\ The Assessment Report notes that the Temporary GSE QM loan
definition may itself be inhibiting the growth of the non-QM
market.\79\ However, the Report also notes that it is possible that
this market might not exist even with a narrower Temporary GSE QM loan
definition, if consumers were unwilling to pay the premium charged to
cover the potential litigation risk associated with non-QMs, which do
not have a presumption of compliance with the ATR requirements, or if
creditors were unwilling or lack the funding to make the loans.\80\
---------------------------------------------------------------------------
\73\ Id. at 196.
\74\ Id.
\75\ Id.
\76\ Id.
\77\ Id. at 197.
\78\ Id. at 196.
\79\ Id. at 205.
\80\ Id.
---------------------------------------------------------------------------
The Bureau expects that each of these features of the mortgage
market that concentrate lending within the Temporary GSE QM loan
definition will largely persist through the current January 10, 2021
sunset date.
D. Effects of the COVID-19 Pandemic on Mortgage Markets
The COVID-19 pandemic has had a significant effect on the U.S.
economy. Economic activity has contracted, some businesses have
partially or completely closed, and millions of workers have become
unemployed. The pandemic has also affected mortgage markets and has
resulted in a contraction of mortgage credit availability for many
consumers, including those that would be dependent on the non-QM market
for financing. The pandemic's impact on both the secondary market for
new originations and on the servicing of existing mortgages has
contributed to this contraction, as described below.
1. Secondary Market Impacts and Implications for Mortgage Origination
Markets
The economic disruptions associated with the COVID-19 pandemic have
restricted the flow of credit in the U.S. economy, including the
mortgage market. During periods of economic distress, many investors
seek to purchase safer instruments and as tensions and uncertainty rose
in mid-March of 2020, investors moved rapidly towards cash and
government securities.\81\ Indeed, the yield on the 10-year Treasury
note, which moves in the opposite direction as the note's price,
declined while mortgage rates increased between February 2020 and March
2020.\82\ This widening spread was exacerbated by a large supply of
mortgage-backed securities (MBS) entering the market, as investors in
MBS sold large portfolios of agency MBS.\83\ As a result, in March of
2020, the lack of investor demand to purchase mortgages made it
difficult for creditors to originate loans, as many creditors rely on
the ability to profitably sell loans in
[[Page 41722]]
the secondary market to generate the liquidity to originate new loans.
This resulted in mortgages becoming more expensive for both homebuyers
and homeowners looking to refinance.
---------------------------------------------------------------------------
\81\ The Quarterly CARES Act Report to Congress: Hearing Before
the S. Comm. on Banking, Housing, and Urban Affairs, 116th Cong. 2-3
(2020) (statement of Jerome H. Powell, Chairman, Board of Governors
of the Federal Reserve System).
\82\ Laurie Goodman et al., Urban Institute, Housing Finance at
a Glance, Monthly Chartbook, (Mar. 26, 2020), https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-march-2020.
\83\ Agency MBS are backed by loans guaranteed by Fannie Mae,
Freddie Mac, and the Government National Mortgage Association
(Ginnie Mae).
---------------------------------------------------------------------------
On March 15, 2020, the Board announced that it would increase its
holdings of agency MBS by at least $200 billion.\84\ On March 23, 2020,
the Board announced that it would remove this limit and purchase agency
MBS ``in the amounts needed to support smooth market functioning and
effective transmission of monetary policy to broader financial
conditions and the economy.'' \85\ The Board took these actions to
stabilize the secondary market and support the continued flow of
mortgage credit. With these purchases, market conditions have improved
substantially, and the Board has since slowed its pace of
purchases.\86\ This has helped to stabilize mortgage rates, resulting
in a decline in mortgage rates since the Board's intervention.
---------------------------------------------------------------------------
\84\ Press Release, Bd. of Governors of the Fed. Reserve Sys.,
Federal Reserve issues FOMC statement (Mar. 15, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm.
\85\ Press Release, Bd. of Governors of the Fed. Reserve Sys.,
Federal Reserve announces extensive new measures to support the
economy (Mar. 23, 2020), https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm.
\86\ The Quarterly CARES Act Report to Congress: Hearing Before
the S. Comm. on Banking, Housing, and Urban Affairs, 116th Cong. 3
(2020) (statement of Jerome H. Powell, Chairman, Board of Governors
of the Federal Reserve System).
---------------------------------------------------------------------------
Non-agency MBS \87\ are generally perceived by investors as riskier
than agency MBS, and non-QM lending has declined as a result. Issuance
of non-agency MBS declined by 8.2 percent in the first quarter of 2020,
with nearly all the transactions completed in January and February,
before the COVID-19 pandemic began to affect the economy
significantly.\88\ Nearly all major non-QM creditors ceased making
loans in March and April. In May of 2020, issuers of non-agency MBS
began to test the market with deals collateralized by non-QM loans
largely originated prior to the crisis. Moreover, several non-QM
creditors--which largely depend on the ability to sell loans in the
secondary market in order to fund new loans--have begun to resume
originations, albeit with a tighter credit box.\89\ Prime jumbo
financing dropped nearly 22 percent in the first quarter of 2020. Banks
increased interest rates and narrowed the product offering to consumers
with pristine credit profiles, as these loans must be held on portfolio
when the secondary market for non-agency MBS contracts.\90\
---------------------------------------------------------------------------
\87\ Non-agency MBS are not backed by loans guaranteed by Fannie
Mae, Freddie Mac or the Ginnie Mae. This includes securities
collateralized by non-QM loans.
\88\ Brandon Ivey, Non-Agency MBS Issuance Slowed in First
Quarter (2020), https://www.insidemortgagefinance.com/articles/217623-non-agency-mbs-issuance-slowed-in-first-quarter.
\89\ Brandon Ivey, Non-Agency Mortgage Securitization Opening Up
After Pause (2020), https://www.insidemortgagefinance.com/articles/218034-non-agency-mortgage-securitization-opening-up-after-pause.
\90\ Brandon Ivey, Jumbo Originations Drop Nearly 22% in First
Quarter (2020) https://www.insidemortgagefinance.com/articles/218028-jumbo-originations-drop-nearly-22-in-first-quarter.
---------------------------------------------------------------------------
2. Servicing Market Impacts and Implications for Origination Markets
Anticipating that a number of homeowners would struggle to pay
their mortgages due to the pandemic and related economic impacts,
Congress passed and the President signed the Coronavirus Aid, Relief,
and Economic Security Act (the CARES Act) in March 2020. The CARES Act
provides additional protections for borrowers whose mortgages are
purchased or securitized by a GSE and certain federally-backed
mortgages.\91\ The CARES Act mandates a 60-day foreclosure moratorium
for such mortgages. The CARES Act also allows borrowers 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.
---------------------------------------------------------------------------
\91\ Coronavirus Aid, Relief, and Economic Security Act, Public
Law 116-136 (2020). (Includes loans backed by HUD, the U.S.
Department of the Agriculture, the U.S. Department of Veterans
Affairs (VA), Fannie Mae, and Freddie Mac).
---------------------------------------------------------------------------
Following the passage of the CARES Act, some mortgage servicers
remain obligated to make some principal and interest payments to
investors in GSE and Ginnie Mae securities, even if consumers are not
making payments.\92\ Servicers also remain obligated to make escrowed
real estate tax and insurance payments to local taxing authorities and
insurance companies. Significant liquidity is needed to fulfill
servicer obligations to security holders. While servicers are required
to hold liquid reserves to cover anticipated advances, significantly
higher-than-expected forbearance rates over an extended period of time
may lead to liquidity shortages particularly among many non-bank
servicers. According to a weekly survey from the Mortgage Bankers
Association, from March 2, 2020 to June 7, 2020, the total number of
loans in forbearance grew from 0.25 percent to 8.55 percent, with
Ginnie Mae loans having the largest growth from 0.19 percent to 11.83
percent.\93\
---------------------------------------------------------------------------
\92\ The GSEs typically repurchase loans out of the trust after
they fall 120 days delinquent, after which the servicer is no longer
required to advance principal and interest, but Ginnie Mae requires
servicers to advance principal and interest until the default is
resolved. On April 21, 2020, the FHFA confirmed that servicers of
GSE loans will only be required to advance four months of mortgage
payments, regardless of whether the GSEs repurchase the loans from
the trust after 120 days of delinquency.
\93\ Press Release, Mortgage Banker Association, Share of
Mortgage Loans in Forbearance Increases to 8.55%, (June 15, 2020),
https://www.mba.org/2020-press-releases/june/share-of-mortgage-loans-in-forbearance-increases-to-855.
---------------------------------------------------------------------------
To address the anticipated liquidity shortage, on April 10, 2020,
Ginnie Mae released guidance on a Pass-Through Assistance Program
whereby Ginnie Mae will provide financial assistance at a fixed
interest rate to servicers facing a principal and interest shortfall as
a last resort. On April 7, 2020, Ginnie Mae also announced approval of
a servicing advance financing facility, whereby mortgage servicing
rights are securitized and sold to private investors. This change may
alleviate some of the liquidity pressures that may cause a servicer to
draw on the Pass-Through Assistance Program.
Because many mortgage servicers also originate the loans they
service, many creditors have responded to the risk of elevated
forbearances and higher-than-expected monthly advances by imposing
additional underwriting standards for new originations. These new
underwriting standards include more stringent requirements for non-QM,
jumbo, and government loans.\94\ For example, one major bank announced
on April 13, 2020, that it would require prospective home purchasers to
have a minimum 700 FICO score and 20 percent down payment. By lending
only to consumers with high credit scores, lower DTI ratios, or
significant liquid reserves, creditors are managing their risk by
reducing the likelihood that a newly-originated loan will require a
forbearance plan.
---------------------------------------------------------------------------
\94\ Maria Volkova, FHA/VA Lenders Raise Credit Score
Requirements (2020), https://www.insidemortgagefinance.com/articles/217636-fhava-lenders-raise-fico-credit-score-requirements.
---------------------------------------------------------------------------
Moreover, several large warehouse providers--i.e., creditors that
provide financing to mortgage originators and servicers--have
restricted the ability of non-banks to fund loans on their warehouse
line by prohibiting the funding of loans to consumers with lower credit
scores. These types of restrictions mitigate the warehouse lender's
exposure in the event a non-bank fails or is unable to sell the loan
prior to the consumer requesting a forbearance.\95\
---------------------------------------------------------------------------
\95\ On April 22, 2020, the FHFA announced the GSEs would be
permitted to purchase certain loans whereby the borrower requested a
forbearance prior to the sale of the loan for a limited period of
time and at a higher cost.
---------------------------------------------------------------------------
[[Page 41723]]
As of mid-June, historically low interest rates combined with a
leveling off in forbearance rates have resulted in an increase in
refinance activity that has been primarily concentrated in the agency
sector, helping to mitigate some of the servicing liquidity concerns.
However, it is unclear how quickly non-banks will return to the non-QM
market even after the mortgage market in general recovers.
III. The Rulemaking Process
The Bureau has solicited and received substantial public and
stakeholder input on issues related to this proposed rule. In addition
to the Bureau's discussions with and communications from industry
stakeholders, consumer advocates, other Federal agencies,\96\ and
members of Congress, the Bureau issued requests for information (RFIs)
in 2017 and 2018 and in July 2019 issued an advance notice of proposed
rulemaking regarding the ATR/QM Rule (ANPR). The input from these RFIs
and from the ANPR is briefly summarized below.
---------------------------------------------------------------------------
\96\ The Bureau has consulted with agencies including the FHFA,
the Board, FHA, the FDIC, the OCC, the Federal Trade Commission, the
National Credit Union Administration, and the Department of the
Treasury.
---------------------------------------------------------------------------
A. The Requests for Information
In June 2017, the Bureau published a request for information in
connection with the Assessment Report (Assessment RFI).\97\ In response
to the Assessment RFI, the Bureau received approximately 480 comments
from creditors, industry groups, consumer advocacy groups, and
individuals.\98\ The comments addressed a variety of topics, including
the General QM loan definition and the 43 percent DTI limit; perceived
problems with, and potential changes and alternatives to, appendix Q;
and how the Bureau should address the expiration of the Temporary GSE
QM loan definition. The comments expressed a range of ideas for
addressing the expiration of the Temporary GSE QM loan definition, from
making the definition permanent, to applying the definition to other
mortgage products, to extending it for various periods of time, or some
combination of those suggestions. Other comments stated that the
Temporary GSE QM loan definition should be eliminated or permitted to
expire.
---------------------------------------------------------------------------
\97\ 82 FR 25246 (June 1, 2017).
\98\ See Assessment Report, supra note 58, 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.\99\ As part of
the call for evidence, the Bureau published requests for information
relating to, among other things, the Bureau's rulemaking process,\100\
the Bureau's adopted regulations and new rulemaking authorities,\101\
and the Bureau's inherited regulations and inherited rulemaking
authorities.\102\ In response to the call for evidence, the Bureau
received comments on the ATR/QM Rule from stakeholders, including
consumer advocacy groups and industry groups. The comments addressed a
variety of topics, including the General QM loan definition, appendix
Q, and the Temporary GSE QM loan definition. The comments also raised
concerns about, among other things, the risks of allowing the Temporary
GSE QM loan definition to expire without any changes to the General QM
loan definition or appendix Q. The concerns raised in these comments
were similar to those raised in response to the Assessment RFI,
discussed above.
---------------------------------------------------------------------------
\99\ 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).
\100\ 83 FR 10437 (Mar. 9, 2018).
\101\ 83 FR 12286 (Mar. 21, 2018).
\102\ 83 FR 12881 (Mar. 26, 2018).
---------------------------------------------------------------------------
B. The Advance Notice of Proposed Rulemaking
On July 25, 2019, the Bureau issued an advance notice of proposed
rulemaking regarding the ATR/QM Rule (ANPR). The ANPR stated the
Bureau's tentative plans to allow the Temporary GSE QM loan definition
to expire in January 2021 or after a short extension, if necessary, to
facilitate a smooth and orderly transition away from the Temporary GSE
QM loan definition. The Bureau also stated that it was considering
whether to propose revisions to the General QM loan definition in light
of the potential expiration of the Temporary GSE QM loan definition and
requested comments on several topics related to the General QM loan
definition. These topics included: (1) Whether and how the Bureau
should revise the DTI limit in the General QM loan definition; (2)
whether the Bureau should supplement or replace the DTI limit with
another method for directly measuring a consumer's personal finances;
(3) whether the Bureau should revise appendix Q or replace it with
other standards for calculating and verifying a consumer's debt and
income; and (4) whether, instead of a DTI limit, the Bureau should
adopt standards that do not directly measure a consumer's personal
finances.\103\ The Bureau requested comment on how much time industry
would need to change its practices in response to any changes the
Bureau makes to the General QM loan definition.\104\ The Bureau
received 85 comments on the ANPR from businesses in the mortgage
industry (including creditors), consumer advocacy groups, elected
officials, individuals, and research centers.
---------------------------------------------------------------------------
\103\ 84 FR 37155, 37155, 37160-62 (July 31, 2019).
\104\ The Bureau stated that if the amount of time industry
would need to change its practices in response to the rule depends
on how the Bureau revises the General QM loan definition, the Bureau
requested time estimates based on alternative possible definitions.
---------------------------------------------------------------------------
1. Direct Measures of a Consumer's Personal Finances
Commenters largely supported moving away from using the 43 percent
DTI limit as a stand-alone General QM underwriting criterion. While a
few commenters supported maintaining the current General QM loan
definition's 43 percent DTI limit as a stand-alone criterion along with
clarifying revisions to appendix Q, the large majority of commenters--
representing the mortgage industry, consumer advocacy groups, and
research centers--supported either eliminating a DTI limit, replacing
it with other methods of measuring a consumer's ability to repay, such
as cash flow underwriting or residual income, or supplementing it with
additional compensating factors. These commenters asserted that, as a
stand-alone factor, DTI has limited predictiveness of a consumer's
ability to repay and has an adverse impact on responsible access to
credit for low-to-moderate income and minority homeowners.
Many commenters suggested the Bureau consider replacing DTI with an
alternative measure of a consumer's ability to repay, such as residual
income or cash flow underwriting. While some commenters indicated these
alternative measures are more accurate predictors of ability to repay,
others suggested the Bureau conduct additional studies of these
alternative measures and the effectiveness of existing standards, such
as the VA's residual income test.
Other commenters suggested the Bureau promulgate a General QM loan
definition that allows certain compensating factors to supplement a
specific DTI limit. Under this approach, the rule would set a specific
DTI limit (e.g., 43 percent) but would permit loans with higher DTI
ratios to be originated as QMs if the creditor determined that
[[Page 41724]]
certain compensating factors were present. Commenters identified
several potential compensating factors, including cash reserves or past
payment performance history. Advocates for this approach pointed to the
GSEs' underwriting standards, which permit loans with DTI ratios
between 43 and 50 percent if compensating factors are present, as
evidence that higher DTI loans with appropriate consideration of
compensating factors can result in affordable loans. Some of the
commenters suggested the current General QM loan definition's 43
percent DTI limit could be responsibly increased. Some commenters
recommended that the Bureau incorporate compensating factors into the
General QM loan definition but also adopt an overall DTI limit above
which loans could not be originated as General QMs, regardless of any
compensating factors. Under this approach, similar to the GSEs' current
underwriting standards, creditors could originate loans under the
General QM loan definition with DTI ratios under a certain threshold
(e.g., 43 percent) without compensating factors, could originate loans
under the General QM loan definition with DTI ratios between that
threshold and a higher threshold (e.g., 50 percent) if the creditor
identifies certain compensating factors, but could not originate loans
under the General QM loan definition with DTI ratios above the higher
threshold.
The Bureau also solicited comment on whether the rule should retain
appendix Q as the standard for calculating and verifying debt and
income if the rule retains a direct measure of a consumer's personal
finances for General QM. Nearly all commenters agreed that appendix Q
in its existing form is insufficient--specifically, that the
requirements lack clarity in certain areas, which leaves creditors
uncertain of the QM status of their loans. Commenters also criticized
appendix Q for being overly prescriptive and outdated in other areas
and therefore lacking the flexibility to adapt to changing market
conditions. Proponents of eliminating the DTI limit entirely stated
that appendix Q could be eliminated without replacement and that the
Bureau could instead publish supervisory guidance or best practices to
assist creditors in satisfying the ATR requirements. Other commenters
suggested that the rule supplement appendix Q or replace it with
reasonable alternatives that allow for more flexibility, such as the
GSE or FHA standards for verifying income and debt. Although most
commenters advocated for elimination of appendix Q, the commenters that
advocated for retaining appendix Q generally suggested the Bureau
should revise appendix Q to modernize the standards and ease industry
compliance.
2. Alternatives to Direct Measures of a Consumer's Personal Finances
Many commenters argued that there are alternatives that are more
predictive of loan performance and a consumer's ability to repay than
stand-alone direct measures of a consumer's personal finances such as
DTI or residual income. Most commenters noting these alternatives
advocated for eliminating the DTI limit entirely and suggested that
loan product features and loan pricing should serve as the primary
factors that determine a loan's QM status. Commenters that opposed
incorporating alternatives to direct measures of a consumer's personal
finances into the General QM loan definition generally argued that a
creditor's ATR determination is separate and distinct from a creditor's
decision on whether to originate a loan. For example, they argued that
because creditors consider factors unrelated to ability to repay in
determining their cumulative loss exposure--such as the amount of
equity in a property--creditors can originate loans that may not be
affordable for consumers in the long-term. Commenters cited asset-based
lending prior to the crisis, when some creditors originated
unaffordable loans with the intention of refinancing the loan prior to
default or otherwise believed they were protected from loss in the
event of default due to the consumer's equity in the property.
Commenters critical of price-based approaches to the General QM loan
definition also stated that loan pricing includes a wide variety of
factors unrelated to credit quality, such as the value of the mortgage
servicing rights. These commenters also raised concerns about the pro-
cyclical nature of loan pricing. They argued that mortgage interest
rate spreads tend to contract during economic expansions, such that a
price-based approach to the General QM loan definition could grant QM
status to loans that exceed consumers' ability to repay and increase
housing prices. In contrast, they claimed that mortgage interest rate
spreads tend to expand during economic contractions, inhibiting access
to credit. Commenters critical of price-based approaches also raised
concerns that these approaches are vulnerable to lender manipulation.
Most commenters that advocated for removing the DTI limit entirely
from the General QM loan definition suggested the existing General QM
protections are sufficient--including the prohibited product features,
the points-and-fees cap, and the ATR requirements to consider and
verify a consumer's debt, income or assets, DTI, or residual income.
They argued that the rule should continue to rely on the interest rate
spread between the APR and the APOR to distinguish those QM loans
eligible for a safe harbor from those eligible for a rebuttable
presumption of compliance. Proponents of this approach argued that
creditors use a wide variety of factors in the lending decision and
consumers with higher-risk lending attributes receive higher interest
rates to compensate creditors and investors for the added risk.
Accordingly, these commenters argued that the APR spread above the
benchmark APOR is more predictive of the general creditworthiness of a
loan and a consumer's ability to repay than stand-alone measures such
as DTI. While some commenters suggested that the rule should retain the
existing price threshold separating safe harbor QM loans from
rebuttable presumption QM loans, which is 1.5 percentage points above
APOR for most loans, others suggested that it would be appropriate to
increase the threshold. Other commenters suggested there could be an
additional pricing threshold, above which loans would be designated as
non-QM.
Commenters also provided input on the distinction between a safe
harbor presumption of compliance and a rebuttable presumption of
compliance with the ATR requirements. While commenters offered
different views about whether 1.5 percentage points over APOR is
appropriate for distinguishing between safe harbor and rebuttable
presumption QMs, or if it should be increased, most commenters
advocated for maintaining a safe harbor. However, several consumer
advocacy groups suggested all QM loans should be subject to a
rebuttable presumption of compliance. Several commenters noted that the
1.5 percentage point over APOR threshold would disproportionately
prevent smaller loans and loans for manufactured housing from being
originated as QMs. They noted that creditors typically charge more to
recover fixed costs on small loans than on larger loans with equivalent
risk attributes.
Some commenters advocated for an approach whereby the QM
determination would be based primarily on the likelihood of default or
loss given default as determined by an underwriting model. One
commenter recommended that QM status be
[[Page 41725]]
determined by expected default rates in stressed economic conditions,
given certain origination characteristics. Other commenters suggested a
Bureau-approved automated underwriting model could determine a loan's
QM status. Proponents of these approaches argued that an underwriting
model would reflect a more holistic consideration of relevant factors
but remove the risk that creditors misprice or underprice loans due to
competitive pressures. While many commenters acknowledged the
operational complexity associated with the Bureau developing and
maintaining an automated underwriting model, they argued that this
approach would provide creditors with the certainty of a loan's QM
status while most accurately assessing the consumer's ability to
sustain the mortgage payment.
Commenters also argued that consumer performance over an extended
period should be considered sufficient evidence that the creditor
adequately assessed a consumer's ability to repay at origination. They
recommended that a loan that is originated as a non-QM or rebuttable
presumption QM loan should be eligible to ``season'' into a QM safe
harbor loan if the consumer makes timely payments for a pre-determined
length of time. Commenters pointed to the GSE representation and
warranty framework as precedent for this concept and argued that a
creditor's legal exposure to the ATR requirement should also sunset
accordingly. However, several commenters opposed allowing loans to
season into QMs. They argued that a period of successful repayment is
insufficient to presume conclusively that the creditor reasonably
determined ability to repay at origination, that creditors would engage
in gaming to minimize defaults during the seasoning period, and that
seasoning would inappropriately prevent consumers from raising lack of
ability to repay as a defense to foreclosure.
The Bureau is considering adding a seasoning approach to the ATR/QM
Rule. A seasoning approach would create an alternative pathway to QM
safe harbor status for certain mortgages if the consumer has
consistently made timely payments for a specified period of time. The
Bureau in the near future will issue a separate proposal that addresses
adding such an approach to the ATR/QM Rule.
3. Other Temporary GSE QM Loan Issues
As discussed in the ANPR, absent any changes, the Temporary GSE QM
loan definition will remain in effect until January 10, 2021 or the
date the GSEs exit conservatorship, whichever occurs first. The Bureau
sought comment on whether a short extension would be necessary to
minimize market disruption and to potentially facilitate an orderly
transition to a new General QM loan definition. While some industry and
consumer advocates commented that the Temporary GSE QM loan definition
should be made permanent, many commenters supported its expiration
following a short extension to revise the General QM loan definition.
Industry commenters stated that the length of time to implement a new
General QM loan definition would largely be determined by the scale and
complexity of the revisions to the General QM loan definition.
Commenters supporting the price-based approach indicated that a
relatively short implementation period likely would be necessary, given
the approach would largely be a simplification of the existing General
QM construct. Other commenters suggested linking the date of the
Temporary GSE QM loan definition expiration to a period following the
publication date of the final General QM rule, such as one year. As
noted above, the Bureau is issuing a separate NPRM to address the
timing of the expiration of the Temporary GSE QM Loan definition.
IV. Legal Authority
The Bureau is proposing to amend Regulation Z pursuant to its
authority under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-
Frank Act transferred to the Bureau the ``consumer financial protection
functions'' previously vested in certain other Federal agencies,
including the Board. 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.'' \105\ 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.\106\
---------------------------------------------------------------------------
\105\ 12 U.S.C. 5581(a)(1)(A).
\106\ 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.\107\ 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.'' \108\
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.\109\ As
discussed in the section-by-section analysis below, the Bureau is
proposing to issue certain provisions of this proposed rule pursuant to
its rulemaking, adjustment, and exception authority under TILA section
105(a).
---------------------------------------------------------------------------
\107\ 15 U.S.C. 1604(a).
\108\ 15 U.S.C. 1601(a).
\109\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------
TILA section 129C(b)(2)(A). TILA section 129C(b)(2)(A)(vi) provides
the Bureau with authority to establish guidelines or regulations
relating to ratios of total monthly debt to monthly income or
alternative measures of ability to pay regular expenses after payment
of total monthly debt, taking into account the income levels of the
borrower and such other factors as the Bureau may determine relevant
and consistent with the purposes described in TILA section
129C(b)(3)(B)(i).\110\ As discussed in the section-by-section analysis
below, the Bureau is proposing to issue certain provisions of this
proposed rule pursuant to its authority under TILA section
129C(b)(2)(A)(vi).
---------------------------------------------------------------------------
\110\ 15 U.S.C. 1639c(b)(2)(A).
---------------------------------------------------------------------------
TILA section 129C(b)(3)A), (B)(i). TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C; or are necessary and
appropriate to effectuate the purposes of
[[Page 41726]]
TILA sections 129B and 129C, to prevent circumvention or evasion
thereof, or to facilitate compliance with such sections.\111\ In
addition, TILA section 129C(b)(3)(A) directs the Bureau to prescribe
regulations to carry out the purposes of section 129C.\112\ As
discussed in the section-by-section analysis below, the Bureau is
proposing to issue certain provisions of this proposed rule pursuant to
its authority under TILA section 129C(b)(3)(B)(i).
---------------------------------------------------------------------------
\111\ 15 U.S.C. 1639c(b)(3)(B)(i).
\112\ 15 U.S.C. 1639c(b)(3)(A).
---------------------------------------------------------------------------
B. Dodd-Frank Act
Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules to enable the Bureau
to administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof.\113\ TILA and
title X of the Dodd-Frank Act are Federal consumer financial laws.
Accordingly, the Bureau is proposing to exercise its authority under
Dodd-Frank Act section 1022(b) to prescribe rules that carry out the
purposes and objectives of TILA and title X and prevent evasion of
those laws.
---------------------------------------------------------------------------
\113\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------
V. Why the Bureau Is Issuing This Proposal
The Bureau is issuing this proposal to amend the General QM loan
definition because it is concerned that retaining the existing General
QM loan definition with the 43 percent DTI limit after the Temporary
GSE QM loan definition expires would significantly reduce the size of
QM and could significantly reduce access to responsible, affordable
credit. The Bureau is proposing a price-based General QM loan
definition to replace the DTI-based approach because it preliminarily
concludes that a loan's price, as measured by comparing a loan's APR to
APOR for a comparable transaction, is a strong indicator of a
consumer's ability to repay and is a more holistic and flexible measure
of a consumer's ability to repay than DTI alone.
Under the proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. The proposal would retain the existing product-feature
and underwriting requirements and limits on points and fees. Although
the proposal would remove the 43 percent DTI limit from the General QM
loan definition, the proposal would require that the creditor consider
and verify the consumer's 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
proposal would remove appendix Q. To prevent uncertainty that may
result from appendix Q's removal, the proposal would clarify the
requirements to consider and verify a consumer's income, assets, debt
obligations, alimony, and child support. The proposal would preserve
the current threshold separating safe harbor from rebuttable
presumption QMs, under which a loan is a safe harbor QM if its APR
exceeds APOR for a comparable transaction by less than 1.5 percentage
points as of the date the interest rate is set (or by less than 3.5
percentage points for subordinate-lien transactions).
The Bureau is proposing a price-based approach to replace the
specific DTI limit because it is concerned that imposing a DTI limit as
a condition for QM status under the General QM loan definition may be
overly burdensome and complex in practice and may unduly restrict
access to credit because it provides an incomplete picture of the
consumer's financial capacity. In particular, the Bureau is concerned
that conditioning QM status on a specific DTI limit may impair access
to credit for some consumers for whom it might be appropriate to
presume ability to repay for their loans at consummation. For the
reasons set forth below, the Bureau preliminarily concludes that a
price-based General QM loan definition is appropriate because a loan's
price, as measured by comparing a loan's APR to APOR for a comparable
transaction, is a strong indicator of a consumer's ability to repay and
is a more holistic and flexible measure of a consumer's ability to
repay than DTI alone.
A. Overview of the General QM Loan Definition DTI Limit
As discussed above, TILA section 129C(b)(2) defines QM by limiting
certain loan terms and features. The statute generally prohibits a QM
from permitting an increase of the principal balance on the loan
(negative amortization), interest-only payments, most balloon payments,
a term greater than 30 years, and points and fees that exceed a
specified threshold. In addition, the statute incorporates limited
underwriting criteria that overlap with some elements of the general
ATR standard, including prohibiting ``no-doc'' loans where the creditor
does not verify income or assets. TILA does not require DTI ratios to
be included in the definition of a QM. Rather, the statute authorizes,
but does not require, the Bureau to establish additional criteria
relating to monthly DTI ratios, or alternative measures of ability to
pay regular expenses after payment of total monthly debt, taking into
account the income levels of the consumer and other factors the Bureau
determines relevant and consistent with the purposes described in TILA
section 129C(b)(3)(B)(i).
The Board's 2011 ATR/QM Proposal. In the 2011 ATR/QM Proposal, the
Board proposed two alternative approaches to the General QM loan
definition to implement the statutory QM requirements.\114\ The
proposed alternatives differed in the extent to which, in addition to
the statutory QM requirements, they included factors from the ATR
standard, including consideration of the consumer's monthly DTI ratio.
---------------------------------------------------------------------------
\114\ 76 FR 27390, 27453 (May 11, 2011).
---------------------------------------------------------------------------
Alternative 1 under the Board's proposal would have included only
the statutory QM requirements and would not have incorporated the
consumer's DTI ratio, residual income, or other factors from the
general ATR standard.\115\ Among the reasons the Board cited in support
of proposed Alternative 1 was a concern that DTI ratios (and residual
income) are not objective and would not provide certainty that a loan
is in fact a QM.\116\ The Board also cited data showing that a
consumer's DTI ratio generally does not have a significant predictive
power of loan performance, once the effects of credit history, loan
type, and loan-to-value (LTV) ratio are considered.\117\ The Board was
also concerned that the benefit of including DTI ratio (or residual
income) requirements in the definition of QM may not outweigh the risk
of reduced credit availability for certain consumers who may not meet
widely accepted DTI ratio standards but may have other compensating
factors, such as sufficient residual income or other resources, to be
able to reasonably afford the mortgage.\118\ Proposed Alternative 1
would have provided creditors with a safe harbor to establish
compliance with the ATR requirements.
---------------------------------------------------------------------------
\115\ Id. at 27453.
\116\ Id. at 27454.
\117\ Id.
\118\ Id.
---------------------------------------------------------------------------
Proposed Alternative 2 would have included the statutory QM
requirements
[[Page 41727]]
and additional factors from the general ATR standard, including a
requirement to consider and verify the consumer's DTI ratio or residual
income.\119\ The Board expressed concern that, absent a DTI ratio or
residual income requirement, a creditor could originate a QM without
considering the effect of the new loan payment on the consumer's
overall financial picture.\120\ The Board did not propose a specific
limit for the DTI ratio in the QM definition as part of Alternative
2.\121\ The Board cited several reasons for not proposing a specific
DTI limit. First, the Board was concerned that setting a specific DTI
ratio threshold could limit credit availability without providing
adequate off-setting benefits.\122\ Second, outreach conducted by the
Board revealed a range of underwriting guidelines for DTI ratios based
on product type, whether creditors used manual or automated
underwriting, and special considerations for high- and low-income
consumers.\123\ The Board was concerned that setting a specific limit
would require addressing the operational issues related to the
calculation of the DTI ratio, including defining debt and income.\124\
The Board was also concerned that a specific limit would require
tolerance provisions to account for mistakes made in calculating the
DTI ratio.\125\ At the same time, the Board recognized that creditors
and consumers may benefit from a higher degree of certainty surrounding
the QM definition.\126\ Therefore, the Board solicited comment on
whether and how it should prescribe a specific limit for the DTI ratio
or residual income for the QM definition.\127\ The Board's Alternative
2 would have provided a rebuttable presumption of compliance with the
ATR requirements.
---------------------------------------------------------------------------
\119\ Id.
\120\ Id. at 27455.
\121\ Id. at 27460.
\122\ Id.
\123\ Id. at 27461.
\124\ Id.
\125\ Id.
\126\ Id.
\127\ Id.
---------------------------------------------------------------------------
The Bureau's January 2013 Final Rule. The Bureau's January 2013
Final Rule included the statutory QM factors and additional factors
from the general ATR standard in the General QM loan definition in
Sec. 1026.43(e)(2). However, instead of incorporating the approach to
DTI from the ATR standard, which requires a creditor to consider the
consumer's DTI ratio or residual income, the Bureau prescribed for the
General QM loan definition a specific DTI limit of 43 percent in Sec.
1026.43(e)(2)(vi). In adopting this approach, the Bureau explained that
it believed the QM criteria should include a standard for evaluating
the consumer's ability to repay, in addition to the product feature
restrictions and other requirements that are specified in TILA.\128\
The Bureau stated that the TILA ATR/QM provisions are fundamentally
about assuring that the mortgage loan that consumers receive is
affordable, and that the protection from liability afforded to QMs
would not be reasonable if the creditor made the loan without
considering and verifying certain core aspects of the consumer's
financial picture.\129\
---------------------------------------------------------------------------
\128\ 78 FR 6408, 6516 (Jan. 30, 2013).
\129\ Id. at 6516.
---------------------------------------------------------------------------
With respect to DTI, the Bureau noted that DTI ratios are widely
used for evaluating a consumer's ability to repay over time because, as
the available data showed, DTI ratio correlates with loan performance
as measured by delinquency rate.\130\ The January 2013 Final Rule noted
that, at a basic level, the lower the DTI ratio, the greater the
consumer's ability to pay back a mortgage loan.\131\ The Bureau
believed this relationship between the DTI ratio and the consumer's
ability to repay applied both under conditions as they exist at
consummation, as well as under future changed circumstances, such as
increases in payments for adjustable-rate mortgages (ARMs), future
reductions in income, and unanticipated expenses and new debts.\132\
The Bureau's findings regarding DTI ratios relied primarily on analysis
of the FHFA's Historical Loan Performance (HLP) dataset, data provided
by FHA, and data provided by commenters.\133\ The Bureau believed these
data indicated that DTI ratios correlate with loan performance, as
measured by delinquency rate (where delinquency is defined as being
over 60 days late), in any credit cycle.\134\ Within a typical range of
DTI ratios creditors use in underwriting (e.g., under 32 percent DTI to
46 percent DTI), the Bureau noted that generally, there is a gradual
increase in delinquency with higher DTI ratio.\135\ The Bureau also
noted that DTI ratios are widely used as an important part of the
underwriting processes for both governmental programs and private
lenders.\136\
---------------------------------------------------------------------------
\130\ Id. at 6526-27.
\131\ Id. at 6526.
\132\ Id. at 6526-27.
\133\ Id. at 6527.
\134\ Id.
\135\ Id. (citing 77 FR 33120, 33122-23 (June 5, 2012) (Table 2:
Ever 60+ Delinquency Rates, summarizing the HLP dataset by volume of
loans and percentage that were ever 60 days or more delinquent,
tabulated by the total DTI on the loans and year of origination)).
\136\ Id.
---------------------------------------------------------------------------
To provide certainty for creditors regarding the loan's QM status,
the January 2013 Final Rule contained a specific DTI limit of 43
percent as part of the General QM loan definition. The Bureau stated
that a specific DTI limit also provides certainty to assignees and
investors in the secondary market, which the Bureau believed would help
reduce concerns regarding legal risk and promote credit
availability.\137\ The Bureau noted that numerous commenters had
highlighted the value of providing objective requirements determined
based on information contained in loan files.\138\ To that end, the
Bureau provided definitions of debt and income for purposes of the
General QM loan definition in appendix Q, to address concerns that
creditors may not have adequate certainty about whether a particular
loan satisfies the requirements of the General QM loan definition.\139\
---------------------------------------------------------------------------
\137\ Id.
\138\ Id.
\139\ Id.
---------------------------------------------------------------------------
The Bureau selected 43 percent as the DTI limit for the General QM
loan definition because, based on analysis of data available at the
time and comments, the Bureau believed that the 43 percent limit would
advance TILA's goals of creditors not extending credit that consumers
cannot repay while still preserving consumers' access to credit.\140\
The Bureau acknowledged that there is no specific threshold that
separates affordable from unaffordable mortgages; rather, there is a
gradual increase in delinquency rates as DTI ratios increase.\141\
Additionally, the Bureau noted that a 43 percent DTI ratio was within
the range used by many creditors, generally comported with industry
standards and practices for prudent underwriting, and was the threshold
used by FHA as its general boundary at the time the Bureau issued the
January 2013 Final Rule.\142\ The Bureau noted concerns about setting a
higher DTI limit, including concerns that it could allow QM status for
mortgages for which there is not a sound reason to presume that the
creditor had a reasonable belief in the consumer's ability to
repay.\143\ The Bureau was especially concerned about this in the
context of QMs that receive a safe harbor from the ATR
requirements.\144\
[[Page 41728]]
The Bureau was also concerned that a higher DTI limit would result in a
QM boundary that substantially covered the entire mortgage market. If
that were the case, creditors might be unwilling to make non-QM loans,
and the Bureau was concerned that the QM rule would define the limit of
credit availability.\145\ The Bureau also suggested that a higher DTI
limit might require a corresponding weakening of the strength of the
presumption of compliance, which the Bureau believed would largely
defeat the point of adopting a higher DTI limit.\146\
---------------------------------------------------------------------------
\140\ Id.
\141\ Id.
\142\ Id.
\143\ Id. at 6528.
\144\ Id.
\145\ Id.
\146\ Id.
---------------------------------------------------------------------------
Despite the Bureau's inclusion of a specific DTI limit in the
General QM loan definition, the Bureau also acknowledged concerns about
the requirement. The Bureau acknowledged that the Board, in issuing the
2011 ATR/QM Proposal, found that DTI ratios may not have significant
predictive power, once the effects of credit history, loan type, and
LTV ratio are considered.\147\ Similarly, the Bureau noted that some
commenters responding to the 2011 ATR/QM Proposal suggested that the
Bureau should include compensating factors in addition to a specific
DTI ratio threshold due to concerns about restricting access to
credit.\148\ The Bureau acknowledged that a standard that takes into
account multiple factors may produce more accurate ability-to-repay
determinations, at least in specific cases, but was concerned that
incorporating a multi-factor test or compensating factors into the QM
definition would undermine the certainty for creditors and the
secondary market of whether loans were eligible for QM status.\149\ The
Bureau also acknowledged arguments that residual income--generally
defined as the monthly income that remains after a consumer pays all
personal debts and obligations, including the prospective mortgage--may
be a better measure of repayment ability.\150\ However, the Bureau
noted that it lacked sufficient data to mandate a bright-line rule
based on residual income.\151\ The Bureau anticipated further study of
the issue as part of the five-year assessment of the rule.\152\
---------------------------------------------------------------------------
\147\ Id. at 6527.
\148\ Id.
\149\ Id.
\150\ Id. at 6528.
\151\ Id.
\152\ Id.
---------------------------------------------------------------------------
The Bureau acknowledged in the January 2013 Final Rule that the 43
percent DTI limit in the General QM loan definition could restrict
access to credit given market conditions at the time the rule was
issued. Among other things, the Bureau expressed concern that, as the
mortgage market recovered from the financial crisis, there would be a
limited non-QM market, which, in conjunction with the 43 percent DTI
limit, could impair access to credit for consumers with DTI ratios over
43 percent.\153\ To preserve access to credit for such consumers while
the market recovered, the Bureau adopted the Temporary GSE QM loan
definition, which did not include a specific DTI limit. As discussed
below, the Temporary GSE QM loan definition continues to play a
significant role in ensuring access to credit for consumers.
---------------------------------------------------------------------------
\153\ Id. at 6533.
---------------------------------------------------------------------------
B. Considerations Related to the General QM Loan Definition DTI Limit
The Bureau's own experience and the feedback it has received from
stakeholders since issuing the January 2013 Final Rule suggest that
imposing a DTI limit as a condition for QM status under the General QM
loan definition may be overly burdensome and complex in practice and
may unduly restrict access to credit because it provides an incomplete
picture of the consumer's financial capacity. While the Bureau
acknowledges that DTI ratios generally correlate with loan performance,
as the Bureau found in the January 2013 Final Rule and as shown in
recent Bureau analysis described below, the Bureau also notes that a
consumer's DTI ratio is only one way to measure financial capacity and
is not a holistic measure of the consumer's ability to repay.
In particular, the Bureau is concerned that imposing a DTI limit as
a condition for QM status under the General QM loan definition may deny
QM status for loans to some consumers for whom it might be appropriate
to presume ability to repay at consummation, and that denying QM status
to such loans risks denying consumers access to responsible, affordable
credit. Numerous stakeholders, including commenters responding to the
ANPR, have argued that the current approach to DTI ratios as part of
the General QM loan definition is not appropriate because it creates
problems for some consumers' ability to access credit when their DTI
ratio is above a bright-line threshold. These access to credit concerns
are especially acute for lower-income and minority consumers.
The Bureau acknowledges that the current approach to DTI ratios
under the General QM loan definition may also stifle innovation in
underwriting because it focuses on a single metric, with strict
verification rules. The current approach to DTI ratios under the
General QM loan definition may constrain new approaches to assessing
repayment ability, including the use of technology as part of the
underwriting process. Such innovations include certain new uses of cash
flow data and analytics to underwrite mortgage applicants. This
emerging technology has the potential to accurately assess consumers'
ability to repay using, for example, bank account data that can
identify the source and frequency of recurring deposits and payments
and identify remaining disposable income. Identifying the remaining
disposable income could be a method of assessing the consumer's
residual income and could potentially satisfy a requirement to consider
either DTI or residual income, absent a specific DTI limit. This
innovation could potentially expand access to responsible, affordable
mortgage credit, particularly for applicants with non-traditional
income and limited credit history. The potential negative effect of the
rule on innovation in underwriting may be heightened while the market
is largely concentrated in the QM lending space and may limit access to
credit for some consumers with DTI ratios above 43 percent.
The Bureau's 2019 ATR/QM Assessment Report highlights the tradeoffs
of conditioning the General QM loan definition on a DTI limit. The
Assessment Report included specific findings about the General QM loan
definition's DTI limit, including certain findings related to DTI
ratios as probative of a consumer's ability to repay. The Assessment
Report found that loans with higher DTI ratios have been associated
with higher levels of ``early delinquency'' (i.e., delinquency within
two years of origination), which, as explained below, may serve as a
proxy for measuring whether a consumer had a reasonable ability to
repay at the time the loan was consummated.\154\ For example, the
Assessment Report notes that for all periods and samples studied, a
positive relationship between DTI ratios and early delinquency is
present and economically meaningful.\155\ The Assessment Report states
that higher DTI ratios independently increase expected early
delinquency, regardless of other underwriting criteria.\156\
---------------------------------------------------------------------------
\154\ See Assessment Report, supra note 58, at 83-84, 100-05.
\155\ Assessment Report at 104-05.
\156\ Id. at 105.
---------------------------------------------------------------------------
At the same time, findings from the Assessment Report indicate that
the specific 43 percent DTI limit in the
[[Page 41729]]
current rule has restricted access to credit, particularly in the
absence of a robust non-QM market. The report found that, for high-DTI
consumers--i.e., consumers with DTI ratios above 43 percent--who
qualify for loans eligible for purchase or guarantee by the GSEs, the
Rule has not decreased access to credit.\157\ However, the Assessment
Report attributes the fact that the 43 percent DTI limit has not
reduced access to credit for such consumers to the existence of the
Temporary GSE QM loan definition. The findings in the Assessment Report
indicate that there would be some reduction in access to credit for
high-DTI consumers when the Temporary GSE QM loan definition expires,
absent changes to the General QM loan definition. For example, based on
application-level data obtained from nine large lenders, the Assessment
Report found that the January 2013 Final Rule eliminated between 63 and
70 percent of non-GSE eligible, high-DTI home purchase loans.\158\ The
Bureau is concerned about a similar effect for loans with DTI ratios
above 43 percent when the Temporary GSE QM loan definition expires. The
Bureau acknowledges that the Assessment Report's finding, without other
information, does not prove or disprove the effectiveness of the DTI
limit in achieving the purposes of the January 2013 Final Rule in
ensuring consumers' ability to repay the loan. If the denied applicants
in fact lacked the ability to repay, then the reduction in approval
rates is an appropriate consequence of the Rule. However, if the denied
applicants did have the ability to repay, then these data suggest an
unintended consequence of the Rule. This possibility is supported by
the fact that other findings in the Assessment Report suggest that
applicants for high-DTI ratio, non-GSE eligible loans are being denied,
even though other compensating factors indicate that some of them may
have the ability to repay their loans.\159\
---------------------------------------------------------------------------
\157\ See, e.g., id. at 10, 194-96.
\158\ See, e.g., id. at 10-11, 117, 131-47.
\159\ See, e.g., Assessment Report supra note 58, at 150, 153,
Table 20. Table 20 illustrates how the pool of denied non-GSE
eligible high-DTI applicants has changed between 2013 and 2014.
After the introduction of the Rule, the pool of denied applicants
contains more consumers with higher incomes, higher FICO scores, and
higher down payments.
---------------------------------------------------------------------------
The current state of the non-QM market heightens the access to
credit concerns related to the specific 43 percent DTI limit,
particularly if such conditions persist after the expiration of the
Temporary GSE QM loan definition. The Bureau stated in the January 2013
Final Rule that it believed mortgages that could be responsibly
originated with DTI ratios that exceed 43 percent, which historically
includes over 20 percent of mortgages, would be made under the general
ATR standard.\160\ However, the Assessment Report found that a robust
market for non-QM loans above the 43 percent DTI limit has not
materialized as the Bureau had predicted. Therefore, there is limited
capacity in the non-QM market to provide access to credit after the
expiration of the Temporary GSE QM loan definition.\161\ As described
above, the non-QM market has been further reduced by the recent
economic disruptions associated with the COVID-19 pandemic, with most
mortgage credit now available in the QM lending space. The Bureau
acknowledges that the slow development of the non-QM market, and the
recent economic disruptions associated with the COVID-19 pandemic that
may significantly hinder its development in the near term, may further
reduce access to credit outside the QM space.
---------------------------------------------------------------------------
\160\ 78 FR 6408, 6527 (Jan. 30, 2013).
\161\ Assessment Report, supra note 58, at 198.
---------------------------------------------------------------------------
The Bureau also has particular concerns about the effects of the
appendix Q definitions of debt and income on access to credit. The
Bureau intended for appendix Q to provide creditors with certainty
about the DTI ratio calculation to foster compliance with the General
QM loan definition. However, based on extensive stakeholder feedback
and its own experience, the Bureau recognizes that appendix Q's
definitions of debt and income are rigid and difficult to apply and do
not provide the level of compliance certainty that the Bureau
anticipated. Stakeholders have reported that these concerns are
particularly acute for transactions involving self-employed consumers,
consumers with part-time employment, and consumers with irregular or
unusual income streams. The standards in appendix Q could negatively
impact access to credit for these consumers, particularly after
expiration of the Temporary GSE QM loan definition. The Assessment
Report also noted concerns with the perceived lack of clarity in
appendix Q and found that such concerns ``may have contributed to
investors'--and at least derivatively, creditors'--preference'' for
Temporary GSE QM loans.\162\ Appendix Q, unlike other standards for
calculating and verifying debt and income, has not been revised since
2013.\163\ The current definitions of debt and income in appendix Q
have proven to be complex in practice, and, as discussed below, the
Bureau has concerns about other potential approaches to defining debt
and income in connection with conditioning QM status on a specific DTI
limit.
---------------------------------------------------------------------------
\162\ Id. at 193.
\163\ Id. at 193-94.
---------------------------------------------------------------------------
At the time of the January 2013 Final Rule, the Bureau sought to
provide a period for economic, market, and regulatory conditions to
stabilize and for a reasonable transition period to the General QM loan
definition and non-QM loans above a 43 percent DTI ratio. However,
contrary to the Bureau's expectations, lending largely has remained in
the Temporary GSE QM loan space, and a robust and sizable market to
support non-QM lending has not yet emerged.\164\ As noted above, the
Bureau acknowledges that the recent economic disruptions associated
with the COVID-19 pandemic may further hinder development of the non-QM
market, at least in the near term. The Bureau expects that a
significant number of Temporary GSE QM loans would not qualify as
General QM loans under the current rule after the Temporary GSE QM loan
definition expires, either because they have DTI ratios above 43
percent or because their method of documenting and verifying income or
debt is incompatible with appendix Q. Although alternative loan options
would still be available to many consumers after expiration of the
Temporary GSE QM loan definition, the Bureau anticipates that, with
respect to loans that are currently Temporary GSE QM loans and would
not otherwise qualify as General QM loans under the current definition,
some would cost materially more for consumers and some would not be
made at all.
---------------------------------------------------------------------------
\164\ Id. at 198.
---------------------------------------------------------------------------
Specifically, the Bureau's Dodd-Frank Act 1022(b) Analysis, below,
estimates that, as a result of the General QM loan definition's 43
percent DTI limit, approximately 957,000 loans--16 percent of all
closed-end first-lien residential mortgage originations in 2018--would
be affected by the expiration of the Temporary GSE QM loan
definition.\165\ An additional, smaller number of loans that currently
qualify as Temporary GSE QM loans may not fall within the General QM
loan definition after expiration of the Temporary GSE QM loan
definition because the method used for verifying income or debt would
not comply with
[[Page 41730]]
appendix Q.\166\ The Temporary GSE QM loan definition is currently set
to expire upon the earlier of January 10, 2021 or when GSE
conservatorship ends, and the Bureau believes that many loans currently
originated under the Temporary GSE QM loan definition may cost
materially more or may not be made at all, absent changes to the
General QM loan definition. After the Temporary GSE QM loan definition
expires, the Bureau expects that many consumers with DTI ratios above
43 percent who would have received a Temporary GSE QM loan would
instead obtain FHA-insured loans since FHA currently insures loans with
DTI ratios up to 57 percent.\167\ The number of loans that move to FHA
would depend on FHA's willingness and ability to insure such loans,
whether FHA continues to treat all loans that it insures as QMs under
its own QM rule, and how many loans that would have been originated as
Temporary GSE QM loans with DTI ratios above 43 percent exceed FHA's
loan-amount limit.\168\ For example, the Bureau estimates that, in
2018, 11 percent of Temporary GSE QM loans with DTI ratios above 43
percent exceeded FHA's loan-amount limit.\169\ Thus, the Bureau
considers that at most 89 percent of loans that would have been
Temporary GSE QM loans with DTI ratios above 43 percent could move to
FHA.\170\ The Bureau expects that loans that are originated as FHA
loans instead of under the Temporary GSE QM loan definition generally
would cost materially more for many consumers.\171\ The Bureau expects
that some consumers offered FHA loans may choose not to take out a
mortgage because of these higher costs.
---------------------------------------------------------------------------
\165\ Dodd-Frank Act section 1022(b) (analysis cites the
Bureau's prior estimate of affected loans in the ANPR); see 84 FR
37155, 37159 (July 31, 2019).
\166\ Id. at 37159 n.58.
\167\ In fiscal year 2019, approximately 57 percent of FHA-
insured purchase mortgages had a DTI ratio above 43 percent. U.S.
Dep't of Hous. & Urban Dev., Annual Report to Congress Regarding the
Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal
Year 2019, at 33 using data from App. B Tabl. B9 (Nov. 14, 2018),
https://www.hud.gov/sites/dfiles/Housing/documents/2019FHAAnnualReportMMIFund.pdf.
\168\ 84 FR 37155, 37159 (July 31, 2019).
\169\ Id. In 2018, FHA's county-level maximum loan limits ranged
from $294,515 to $679,650 in the continental United States. See U.S.
Dep't of Hous. & Urban Dev., FHA Mortgage Limits, https://entp.hud.gov/idapp/html/hicostlook.cfm (last visited June 21, 2020).
\170\ 84 FR 37155, 37159 (July 31, 2019).
\171\ Interest rates and insurance premiums on FHA loans
generally feature less risk-based pricing than conventional loans,
charging more similar rates and premiums to all consumers. As a
result, they are likely to cost more than conventional loans for
consumers with stronger credit scores and larger down payments.
Consistent with this pricing differential, consumers with higher
credit scores and larger down payments chose FHA loans relatively
rarely in 2018 HMDA data on mortgage originations. See Bureau of
Consumer Fin. Prot., Introducing New and Revised Data Points in
HMDA, August 2019, https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
---------------------------------------------------------------------------
It is also possible that some consumers with DTI ratios above 43
percent would be able to obtain loans in the private market.\172\ The
ANPR noted that the number of loans absorbed by the private market
would likely depend, in part, on whether actors in the private market
are willing to assume the legal or credit risk associated with
funding--as non-QM loans or small-creditor portfolio QM loans--loans
that would have been Temporary GSE QM loans (with DTI ratios above 43
percent) \173\ and, if so, whether actors in the private market would
offer more competitive pricing or terms.\174\ For example, the Bureau
estimates that 55 percent of loans that would have been Temporary GSE
QM loans (with DTI ratios above 43 percent) in 2018 had credit scores
at or above 680 and LTV ratios at or below 80 percent--credit
characteristics traditionally considered attractive to actors in the
private market.\175\ The ANPR also noted that there are certain built-
in costs to FHA loans--namely, mortgage insurance premiums--which could
be a basis for competition, and that depository institutions in recent
years have shied away from originating and servicing FHA loans due to
the obligations and risks associated with such loans.\176\ At the same
time, the Assessment Report found there has been limited momentum
toward a greater role for private market non-QM loans. It is uncertain
how great this role will be in the future,\177\ particularly in the
short term due to the economic effects of the COVID-19 pandemic.
Finally, the ANPR noted that some consumers with DTI ratios above 43
percent who would have sought Temporary GSE QM loans may adapt to
changing options and make different choices, such as adjusting their
borrowing to result in a lower DTI ratio.\178\ However, some consumers
who would have sought Temporary GSE QM loans (with DTI ratios above 43
percent) may not obtain loans at all.\179\ For example, based on
application-level data obtained from nine large lenders, the Assessment
Report found that the January 2013 Final Rule eliminated between 63 and
70 percent of non-GSE eligible, high-DTI home purchase loans.\180\
---------------------------------------------------------------------------
\172\ 84 FR 37155, 37159 (July 31, 2019).
\173\ See 12 CFR 1026.43(e)(5) (extending QM status to certain
portfolio loans originated by certain small creditors). In addition,
section 101 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, 132 Stat. 1296 (2018), amended
TILA to add a safe harbor for small creditor portfolio loans. See 15
U.S.C. 1639c(b)(2)(F).
\174\ 84 FR 37155, 37159 (July 31, 2019).
\175\ Id.
\176\ Id.
\177\ Id.
\178\ Id.
\179\ Id.
\180\ See Assessment Report supra note 58, at 10-11, 117, 131-
47.
---------------------------------------------------------------------------
In the separate Extension Proposal, the Bureau is proposing to
replace the January 10, 2021 sunset date with a provision that would
amend the Temporary GSE QM loan definition so that it would expire upon
the earlier of the effective date of final amendments to the General QM
loan definition, or when GSE conservatorship ends.\181\ The Bureau is
issuing that separate proposal to ensure that responsible, affordable
credit remains available to consumers who may be affected if the
Temporary GSE QM loan definition expires before amendments to the
General QM loan definition take effect.
---------------------------------------------------------------------------
\181\ As the Bureau notes in the separate Extension Proposal,
the Bureau does not intend for the effective date of final
amendments to the General QM loan definition to be prior to April 1,
2021. Thus, the Bureau does not intend for the Temporary GSE QM loan
definition to expire prior to April 1, 2021.
---------------------------------------------------------------------------
C. Why the Bureau Is Proposing a Price-Based QM Definition To Replace
the General QM Loan Definition DTI Limit
Given the significant issues associated with the 43 percent DTI
limit, the Bureau is proposing to remove that requirement from the
General QM loan definition in Sec. 1026.43(e)(2)(vi) and replace it
with a requirement based on the price of the loan. Specifically, in
addition to the statutory product features and underwriting
restrictions that apply under the current rule, a loan would meet the
General QM loan definition only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. The proposal would provide higher
thresholds for loans with smaller loan amounts and for subordinate-lien
transactions. Although the proposal would remove the 43 percent DTI
limit from the General QM loan definition, it would require that the
creditor: (1) Consider the consumer's income or assets, debt
obligations, alimony, and child support, and monthly DTI ratio or
residual income, and (2) 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 proposal would remove appendix Q but would clarify the
requirements to consider and verify a consumer's
[[Page 41731]]
income, assets, debt obligations, alimony, and child support, to help
prevent compliance uncertainty that could otherwise result from the
removal of appendix Q. Consistent with the current rule, the proposal
would preserve the current threshold separating safe harbor from
rebuttable presumption QMs, under which a loan is a safe harbor QM if
its APR exceeds APOR for a comparable transaction by less than 1.5
percentage points as of the date the interest rate is set.\182\
---------------------------------------------------------------------------
\182\ The current rule provides a higher safe harbor threshold
of 3.5 percentage points over APOR for small creditor portfolio QMs
and balloon-payment QMs made by certain small creditors pursuant to
Sec. 1026.43(e)(5), (e)(6) and (f). See Sec. 1026.43(b)(4). This
proposal would not alter those thresholds.
---------------------------------------------------------------------------
The Bureau acknowledges there is significant debate over whether
loan pricing, a consumer's DTI ratio, or another direct or indirect
measure of a consumer's personal finances is a better predictor of loan
performance, particularly when analyzed across various points in the
economic cycle.\183\ Some commenters responding to the ANPR advocated
for retaining a DTI requirement as part of the General QM loan
definition, arguing that it is a strong indicator of a consumer's
ability to repay. Other commenters suggested a range of options to
replace the current DTI requirement in the General QM loan definition,
including by prescribing a residual income test; allowing compensating
factors (such as LTV ratios and credit scores) in conjunction with a
DTI ratio; and defining QM by reference to widely used underwriting
standards. In seeking comments on this proposal, the Bureau is not
determining whether DTI ratios, a loan's price, or some other measure
is the best predictor of loan performance. As discussed below, analysis
provided by stakeholders and the Bureau's own analysis show that
pricing is strongly correlated with loan performance, based on early
delinquency rates, across a variety of loans and economic conditions.
However, the Bureau acknowledges that DTI is also predictive of loan
performance and that other direct and indirect measures of consumer
finances may also be predictive of loan performance. The Bureau does
not make a finding here on whether or to what extent one measure
clearly outperforms others in predicting loan performance. Rather, the
Bureau has weighed several policy considerations in selecting an
approach for the proposal based on the purposes of the ATR/QM
provisions of TILA.
---------------------------------------------------------------------------
\183\ See, e.g., Norbert Michel, The Best Housing Finance Reform
Options for the Trump Administration, Forbes (July 15, 2019),
https://www.forbes.com/sites/norbertmichel/2019/07/15/the-best-housing-finance-reform-options-for-the-trump-administration/#4f5640de7d3f; Eric Kaplan et al., Milken Institute, A Blueprint for
Administrative Reform of the Housing Finance System, at 17 (Jan.
2019), https://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Blueprint-Admin-Reform-HF-System-1.7.2019-v2.pdf
(suggesting that the Bureau both (1) expand the 43 percent DTI limit
to 45 percent to move market share of higher-DTI loans from the GSEs
and FHA to the non-agency market, and (2) establish a residual
income test to protect against the risk of higher DTI loans); Morris
Davis et al., A Quarter Century of Mortgage Risk (FHFA, Working
Paper 19-02, 2019), https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/wp1902.aspx (examining various loan characteristics
and a summary measure of risk--the stressed default rate--for
predictiveness of loan performance).
---------------------------------------------------------------------------
In particular, the Bureau has balanced considerations related to
ensuring consumers' ability to repay and maintaining access to credit
in deciding to seek comment on replacing the current 43 percent DTI
limit with a price-based approach. The Bureau continues to view the
statute as fundamentally about assuring that consumers receive mortgage
credit that they are able to repay. However, the Bureau is also
concerned about maintaining access to responsible, affordable mortgage
credit. The Bureau is concerned that the current General QM loan
definition, with a 43 percent DTI limit, would result in a significant
reduction in the scope of QM and could reduce access to responsible,
affordable mortgage credit after the Temporary GSE QM loan definition
expires. The lack of a robust non-QM market enhances those concerns.
Although the Bureau noted in the January 2013 Final Rule that it
expected access to credit outside of the QM lending space to develop
over time, the Assessment Report found that a robust and sizable market
to support non-QM lending has not emerged since the Rule took
effect.\184\ The Bureau also acknowledges that the non-QM market has
been further reduced by the recent economic disruptions associated with
the COVID-19 pandemic, with most mortgage credit now available in the
QM lending space. Although it remains possible that, over time, a
substantial market for non-QM loans will emerge, that market has
developed slowly, and the recent economic disruptions associated with
the COVID-19 pandemic may significantly hinder its development, at
least in the near term.
---------------------------------------------------------------------------
\184\ Assessment Report, supra note 58, at 198.
---------------------------------------------------------------------------
With respect to ability to repay, the Bureau has focused on
analysis of early delinquency rates to evaluate whether a loan's price,
as measured by the spread of APR over APOR (herein referred to as the
loan's rate spread), may be an appropriate measure of whether a loan
should be presumed to comply with the ATR provisions. 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 reasonably within consumers' ability to repay.\185\ As such,
consistent with the Bureau's prior analyses in the Assessment Report,
the Bureau uses early distress as a proxy for the lack of the
consumer's ability to repay at consummation across a wide pool of
loans. Consistent with the Assessment Report, for the analyses of early
delinquency rates below, the Bureau measures early distress as whether
a consumer was ever 60 or more days past due within the first 2 years
after origination (referred to herein as the early delinquency
rate).\186\ The Bureau's analysis focuses on early delinquency rates to
capture consumers' difficulties in making payments soon after
consummation of the loan (i.e., within the first 2 years), even if
these delinquencies do not lead to consumers potentially losing their
homes (i.e., 60 or more days past due, as opposed to 90 or more days or
in foreclosure), as early difficulties in making payments indicates
higher likelihood that the consumer may have lacked ability to repay at
consummation. As in the Assessment Report, the Bureau assumes that the
average early delinquency rate across a wide pool of mortgages--whether
safe harbor QM, rebuttable presumption QM, or non-QM--is probative of
whether such loans are reasonably within consumers' repayment ability,
and that the dependence of these early delinquency rates on the
defining characteristics of such loans is probative of how those
characteristics may influence repayment ability. The Bureau
acknowledges that alternative measures of delinquency, including those
used in analyses submitted as comments on the ANPR, may also be
probative of repayment ability.
---------------------------------------------------------------------------
\185\ Id. at 83.
\186\ Id.
---------------------------------------------------------------------------
The Bureau has reviewed the available evidence to assess whether
rate spreads can distinguish loans that are likely to have low early
delinquency rates--and thus may be presumed to reasonably reflect the
consumer's ability to repay--from loans that are likely to have higher
rates of delinquency--for which it would not be appropriate to presume
the consumer's ability to repay. The Bureau's own analysis and recent
[[Page 41732]]
analyses published in response to the Bureau's ANPR and RFIs provide
strong evidence of increasing early delinquency rates with higher rate
spreads across a range of datasets, time periods, loan types, measures
of rate spread, and measures of delinquency. The Bureau's delinquency
analysis uses data from the National Mortgage Database (NMDB),\187\
including a matched sample of NMDB and HMDA loans.\188\ As described
below, analysis of these datasets shows that early delinquency rates
rise with rate spread.
---------------------------------------------------------------------------
\187\ 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. (The NMDB, jointly developed by the FHFA and the
Bureau, provides de-identified loan characteristics and performance
information for a five 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.)
\188\ HMDA was originally enacted by Congress in 1975 and is
implemented by Regulation C, 12 CFR part 1003. See Bureau of
Consumer Fin. Prot., Mortgage data (HMDA), https://www.consumerfinance.gov/data-research/hmda/. HMDA requires many
financial institutions to maintain, report, and publicly disclose
loan-level information about mortgages. These data are housed here
to help show whether lenders are serving the housing needs of their
communities; they give public officials information that helps them
make decisions and policies; and they shed light on lending patterns
that could be discriminatory. The public data are modified to
protect applicant and borrower privacy.
---------------------------------------------------------------------------
Table 1 shows early delinquency rates for 2002-2008 first-lien
purchase originations in the NMDB, with loans categorized according to
their approximate rate spread. The Bureau analyzed 2002 through 2008
origination years because the relatively fixed private mortgage
insurance (PMI) pricing during these years allows for reliable
approximation of this important component of rate spreads.\189\ The
sample is restricted to loans without product features that would make
them non-QM under the current rule. Table 1 shows that early
delinquency rates increase consistently with rate spreads, from a low
of 2 percent among loans with rate spreads below or near zero, up to 14
percent for loans with rate spreads of 2.25 percentage points or more
over APOR.\190\ The Bureau notes that this sample includes loans
originated during the peak of the housing boom and delinquencies that
occurred during the ensuing recession, contributing to the high overall
levels of early delinquency.
---------------------------------------------------------------------------
\189\ See Neil Bhutta and Benjamin J. Keys, Eyes Wide Shut? The
Moral Hazard of Mortgage Insurers during the Housing Boom, NBER
Working Paper No. 24844, https://www.nber.org/papers/w24844.pdf.
APOR is approximated with weekly Freddie Mac Primary Mortgage Market
Survey (PMMS) data, retrieved from Fed. Reserve Bank of St. Louis,
Fed. Reserve Econ. Data,; https://fred.stlouisfed.org/, March 4,
2020. Each loan's APR is approximated by the sum of the interest
rate in the NMDB data and an assumed PMI payment of 0.32, 0.52, or
0.78 percentage points for loans with LTVs above 80 but at or below
85, above 85 but at or below 90, and above 90, respectively. These
PMI are based on standard industry rates during this time period.
The 30-year Fixed Rate PMMS average is used for fixed-rate loans
with terms over 15 years, and 15-year Fixed Rate PMMS is used for
loans with terms of 15 years or less. The 5/1-year Adjustable-Rate
PMMS average is used (for available years) for ARMs with a first
interest rate reset occurring 5 or more years after origination,
while the 1-year adjustable-rate PMMS average is used for all other
ARMs.
\190\ Loans with rate spreads of 2.25 percentage points or more
are grouped in Tables 1 and 5 to ensure sufficient sample size for
reliable analysis of the 2002-2008 data. This grouping ensures that
all cells shown in Table 5 contain at least 500 loans.
Table 1--2002-2008 Originations, Early Delinquency Rate by Rate Spread
------------------------------------------------------------------------
Early
Rate spread (interest rate + PMI approximation-- delinquency rate
PMMS\191\) in percentage points (percent)
------------------------------------------------------------------------
< 0.................................................. 2
0-0.24............................................... 2
0.25-0.49............................................ 4
0.50-0.74............................................ 5
0.75-0.99............................................ 6
1.00-1.24............................................ 8
1.25-1.49............................................ 10
1.50-1.74............................................ 12
1.75-1.99............................................ 13
2.00-2.24............................................ 14
2.25 and above....................................... 14
------------------------------------------------------------------------
Analysis of additional data, as reflected in Table 2, also shows
early delinquency rates rising with rate spread. Table 2 shows early
delinquency statistics for 2018 NMDB first-lien purchase originations
that have been matched to 2018 HMDA data, enabling the Bureau to use
actual rate spreads over APOR rather than approximated rate spreads in
its analysis.\192\ As with the data reflected in Table 1, loans with
product features that would make them non-QM under the current rule are
excluded from Table 2. However, only delinquencies occurring through
December 2019 are observed in Table 2, meaning most loans are not
observed for a full two years after origination. This more recent
sample provides insight into early delinquency rates under post-crisis
lending standards, and for an origination cohort that had not undergone
(as of December 2019) a large economic downturn. The 2018 data are
divided into wider bins (as compared to Table 1) to ensure enough loans
per bin. As with Table 1, Table 2 shows that early delinquency rates
increase consistently with rate spreads, from a low of 0.2 percent for
loans with rate spreads near APOR or below APOR, up to 4.2 percent for
loans with rate spreads of 2 percentage points or more over APOR.\193\
---------------------------------------------------------------------------
\191\ Freddie Mac's PMMS is the source of data underlying APOR
rate for most mortgages. See supra note 189 for additional details.
\192\ Where possible, the FHFA provided an anonymized match of
HMDA loan identifiers for 2018 NMDB originations, allowing the
Bureau to analyze more detailed HMDA loan characteristics (e.g.,
rate spread over APOR) for approximately half of 2018 NMDB
originations.
\193\ Loans with rate spreads of 2 percentage points or more are
grouped in Tables 2 and 6 to ensure sufficient sample size for
reliable analysis of the 2018 data. This grouping ensures that all
cells shown in Table 6 contain at least 500 loans.
Table 2--2018 Originations, Early Delinquency Rate by Rate Spread
------------------------------------------------------------------------
Early delinquency
Rate spread over APOR in percentage points rate (as of Dec.
2019) (percent)
------------------------------------------------------------------------
< 0.................................................. 0.2
0-0.49............................................... 0.2
0.50-0.99............................................ 0.6
1.00-1.49............................................ 1.7
1.50-1.99............................................ 2.7
2.00 and above....................................... 4.2
------------------------------------------------------------------------
Given the specific DTI limit under the current rule, the Bureau
also analyzed the relationship between DTI ratios and early delinquency
for the same samples of loans in Tables 3 and 4. The Bureau's analyses
show that early delinquency rates increase consistently with DTI ratio
in both samples. In the 2002-2008 sample, early delinquency rates
increase from a low of 3 percent among loans with DTI ratios at or
below 25 percent, up to 9 percent for loans with DTI ratios between 61
and 70 percent.\194\ In the 2018 sample, early delinquency rates
increase from 0.4 percent among loans with DTI ratios at or below 25
percent, up to 0.9 percent among loans with DTI ratios between 44 and
50.\195\ The difference in early delinquency rates between loans with
the highest and lowest DTI ratios is smaller than the difference in
early delinquency rates between the highest and lowest rate spreads
during both periods. For these samples and bins of rate spread and DTI
ratios, this pattern is consistent with a stronger correlation between
rate spread and early delinquency than between DTI ratios and early
delinquency.
---------------------------------------------------------------------------
\194\ Fewer than 0.7 percent of loans have reported DTI ratios
over 70 percent in the 2002-2008 data. These loans are excluded from
Tables 3 and 5 due to reliability concerns and to ensure that all
cells shown in Table 5 contain at least 500 loans.
\195\ Fewer than 0.5 percent of loans have reported DTI ratios
over 50 percent in the 2018 data. These loans are excluded from
Tables 4 and 6 due to reliability concerns and to ensure that all
cells shown in Table 6 contain at least 500 loans.
[[Page 41733]]
Table 3--2002-2008 Originations, Early Delinquency Rate by DTI Ratio
(percentage)
------------------------------------------------------------------------
Early
DTI delinquency rate
------------------------------------------------------------------------
0-20................................................. 3
21-25................................................ 3
26-30................................................ 4
31-35................................................ 5
36-40................................................ 6
41-43................................................ 6
44-45................................................ 7
46-48................................................ 7
49-50................................................ 8
51-60................................................ 8
61-70................................................ 9
------------------------------------------------------------------------
Table 4--2018 Originations, Early Delinquency Rate by DTI
------------------------------------------------------------------------
Early
delinquency rate
DTI (as of Dec. 2019)
(percent)
------------------------------------------------------------------------
0-25................................................. 0.4
26-35................................................ 0.5
36-43................................................ 0.7
44-48................................................ 0.9
49-50................................................ 0.9
------------------------------------------------------------------------
To further analyze the strengths of DTI ratios and pricing in
predicting early delinquency rates, Tables 5 and 6 show the early
delinquency rates of these same samples categorized according to both
their DTI ratios and their rate spreads. Table 5 shows early
delinquency rates for 2002-2008 first-lien purchase originations in the
NMDB, with loans categorized according to both their DTI ratio and
their approximate rate spread. For loans within a given DTI ratio
range, those with higher rate spreads consistently had higher early
delinquency rates. Loans with low rate spreads had relatively low early
delinquency rates even at high DTI ratio levels, as seen in the 2
percent early delinquency rate for loans priced below APOR but with DTI
ratios of 46 to 48 percent, 51 to 60 percent, and 61 to 70 percent.
However, the highest early delinquency rates occurred for loans with
high rate spreads and high DTI ratios, reaching 26 percent for loans
priced 2 to 2.24 percentage points above APOR with DTI ratios of 61 to
70 percent. Across DTI bins, loans priced 2 percentage points or more
above APOR had early delinquency much higher than loans priced below
APOR.
Table 5--2002-2008 Originations, Early Delinquency Rate by Rate Spread and DTI Ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
DTI 0- DTI 21- DTI 26- DTI 31- DTI 36- DTI 41- DTI 44- DTI 46- DTI 49- DTI 51- DTI 61-
Rate spread (interest rate + PMI approx.--PMMS) in 20 (%) 25 (%) 30 (%) 35 (%) 40 (%) 43 (%) 45 (%) 48 (%) 50 (%) 60 (%) 70 (%)
percentage points
--------------------------------------------------------------------------------------------------------------------------------------------------------
<0................................................... 2 1 1 2 2 2 2 2 3 2 2
0-0.24............................................... 2 2 2 2 2 3 3 3 3 3 3
0.25-0.49............................................ 3 3 3 3 4 5 4 5 5 5 5
0.50-0.74............................................ 4 4 4 4 5 6 6 6 7 7 7
0.75-0.99............................................ 4 5 5 6 6 7 7 7 8 8 10
1.00-1.24............................................ 6 6 6 7 7 9 9 9 10 11 13
1.25-1.49............................................ 6 7 8 8 10 11 12 12 12 14 15
1.50-1.74............................................ 7 8 9 10 13 13 15 14 16 15 20
1.75-1.99............................................ 7 8 10 12 14 15 16 16 16 18 22
2.00-2.24............................................ 6 10 10 12 15 15 17 19 18 20 26
2.25 and above....................................... 7 9 10 13 15 16 16 18 19 20 25
--------------------------------------------------------------------------------------------------------------------------------------------------------
Similarly, Table 6 shows average early delinquency statistics, with
loans categorized according to both DTI and rate spread, for the sample
of 2018 NMDB first-lien purchase originations that have been matched to
2018 HMDA data.\196\ For Table 6, the higher early delinquency rate for
loans with higher rate spreads over APOR matches the pattern shown in
the data from Table 5. Overall early delinquency rates are
substantially lower, reflecting the importance of economic conditions
in the likelihood of delinquency for any given consumer. However, the
2018 loans priced 2 percentage points or more above APOR also had early
delinquency rates much higher than loans priced below APOR.
---------------------------------------------------------------------------
\196\ As in Tables 2 and 4, above, the 2018 data are divided
into larger bins to ensure enough loans per bin. Loans with a DTI
ratio greater than 50 percent are excluded, as well as loans with a
DTI ratio at or below 25 percent and rate spreads of 1.5 percentage
points and above, because these bins contained fewer than 500 loans
in the matched 2018 NMDB-HMDA sample.
Table 6--2018 Originations, Early Delinquency Rate by Rate Spread and DTI Ratio
----------------------------------------------------------------------------------------------------------------
DTI 0-25 DTI 26-35 DTI 36-43 DTI 44-50
Rate spread over APOR in percentage points (%) (%) (%) (%)
----------------------------------------------------------------------------------------------------------------
< 0......................................................... 0.1 0.1 0.2 0.3
0-0.49...................................................... 0.2 0.1 0.3 0.3
0.50-0.99................................................... 0.1 0.4 0.8 0.8
1.00-1.49................................................... 1.0 1.4 1.5 2.3
1.50-1.99................................................... ........... 3.2 2.5 2.3
2.00 and above.............................................. ........... 4.4 3.9 4.2
----------------------------------------------------------------------------------------------------------------
The Bureau notes that the high relative risk of early delinquency
for higher-priced loans holds across samples, demonstrating that rate
spreads distinguish early delinquency risk under a range of economic
conditions and creditor practices. Analyses published in response to
the Bureau's ANPR and RFIs are consistent
[[Page 41734]]
with the Bureau's analysis showing that early delinquency rates rise
consistently with rate spread. For example, CoreLogic analyzes a set of
2018 HMDA conventional mortgage originations merged to loan performance
data collected from mortgage servicers.\197\ The CoreLogic analysis
finds: (1) The lowest delinquency rates among loans with rate spreads
that are below APOR, and (2) increased early delinquency rates for each
sequentially higher bin of rate spreads up to two percentage points. In
assessing the CoreLogic analysis, the Bureau notes that loans priced at
or above two percentage points over APOR in the 2018 HMDA data are
relatively rare and are disproportionately made for manufactured
housing and smaller loan amounts and therefore may not be well
represented in mortgage servicing datasets. However, these loans also
have relatively high rates of delinquency.\198\ CoreLogic finds a
similar, but more variable, positive relationship between rate spreads
over APOR and delinquency in earlier cohorts (2010-2017) of merged
HMDA-CoreLogic originations, a period in which rate spreads were only
reported for loans priced at least 1.5 percentage points over
APOR.\199\
---------------------------------------------------------------------------
\197\ See Archana Pradhan & Pete Carroll, Expiration of the
CFPB's Qualified Mortgage (QM) GSE Patch--Part V, LogicCore Insights
Blog, (Jan. 13, 2020), https://www.corelogic.com/blog/2020/1/expiration-of-the-cfpbs-qualified-mortgage-qm-gse-patch-part-v.aspx.
Delinquency was measured as of October 2019, so loans do not have
two full years of payment history.
\198\ The Bureau analyzes the performance and pricing for
smaller loans in the section-by-section analysis for Sec.
1026.43(e)(2)(vi).
\199\ See Archana Pradhan & Pete Carroll, Expiration of the
CFPB's Qualified Mortgage (QM) GSE Patch--Part IV, LogicCore
Insights Blog, (Jan. 11, 2020), https://www.corelogic.com/blog/2020/1/expiration-of-the-cfpbs-qualified-mortgage-qm-gse-patch-part-iv.aspx. Delinquency measured as of October 2019.
---------------------------------------------------------------------------
Further, using loan performance data from Black Knight, analyses by
the Urban Institute show a comparable positive relationship between
rate spreads--measured there as the note rate over Freddie Mac's
Primary Mortgage Market Survey--and delinquency.\200\ The analysis
finds that the relationship holds across a range of loan types
(conventional loans held in portfolio, in GSE securitizations, and in
private securitizations; FHA loans; VA loans) and years (1995-2018).
Additional analyses by the Urban Institute show the same positive
relationship between rate spread and loan performance in Fannie Mae
loan-level performance data.\201\
---------------------------------------------------------------------------
\200\ See Karan Kaul & Laurie Goodman, Urban Inst., Updated:
What, If Anything, Should Replace QM GSE Patch, (Oct. 2020), at 9,
https://www.urban.org/sites/default/files/publication/99268/2018_10_30_qualified_mortgage_rule_update_finalized_4.pdf.
\201\ See Karan Kaul et al., Urban Inst., Comment Letter to the
Consumer Financial Protection Bureau on the Qualified Mortgage Rule,
(Sept. 2019), at 9-10, https://www.urban.org/sites/default/files/publication/101048/comment_letter_to_the_consumer_financial_protection_bureau_0.pdf.
---------------------------------------------------------------------------
Collectively, this evidence suggests that higher rate spreads--
including the specific measure of APR over APOR--are strongly
correlated with early delinquency rates. Given that early delinquency
captures consumers' difficulty making required payments, these rate
spreads provide a proxy measure for whether the terms of mortgage loans
reasonably reflect consumers' ability to repay at the time of
origination. The Bureau acknowledges that a test that combines rate
spread and DTI may better predict early delinquency rates than either
metric on its own. However, any rule with a specific DTI limit would
need to provide standards for calculating the income that may be
counted and the debt that must be counted so that creditors and
investors can ensure with reasonable certainty that they have
accurately calculated DTI within the specific DTI limit. As noted above
and discussed further below, the current definitions of debt and income
in appendix Q have proven to be complex in practice and may unduly
restrict access to credit. The Bureau has concerns about whether other
potential approaches could define debt and income with sufficient
clarify while at the same time providing flexibility to accommodate new
approaches to verification and underwriting. As noted in part V.E
below, the Bureau is requesting comment on whether the rule should
retain a specific DTI limit and, if so, whether the Bureau's proposed
approach to verification of income and debt in Sec. 1026.43(e)(2)(v)
would provide a workable method for defining debt and income for a
specific DTI limit. Part V.E below requests comment on whether certain
aspects of proposed Sec. 1026.43(e)(2)(v) could be applied to a
General QM loan definition that includes a specific DTI limit.
In addition to strongly correlating with loan performance, the
Bureau tentatively concludes that a price-based QM definition, rather
than conditioning QM status on a specific DTI limit, is a more holistic
and flexible measure of a consumer's ability to repay. Mortgage
underwriting, and by extension, a loan's price, generally includes
consideration of a consumer's DTI. However, loan pricing also includes
assessment of additional factors, including LTV ratios, credit scores,
and cash reserves, that might compensate for a higher DTI ratio and
that might also be probative of a consumer's ability to repay. One of
the primary criticisms of the current 43 percent DTI ratio is that it
is too limited in assessing a consumer's finances and, as such, may
unduly restrict access to credit for some consumers for whom it might
be appropriate to presume ability to repay at consummation. Therefore,
a potential benefit of a price-based QM definition is that a mortgage
loan's price reflects credit risk based on many factors, including DTI
ratios, and may be a more holistic measure of ability to repay than DTI
ratios alone. Further, there is inherent flexibility for creditors in a
rate-spread-based QM definition, which could facilitate innovation in
underwriting, including emerging research into alternative mechanisms
to assess a consumer's ability to repay, such as cash flow
underwriting. Although the Bureau is proposing to remove the 43 percent
DTI limit in Sec. 1026.43(e)(2)(vi), the Bureau continues to believe
that DTI is an important factor for creditors to consider in evaluating
consumers' ability to repay. As discussed further in the section-by-
section analysis of Sec. 1026.43(e)(2)(v), below, the Bureau is
proposing to require creditors to consider a consumer's DTI ratio or
residual income to satisfy the General QM loan definition.
The Bureau also notes that there is significant precedent for using
the price of a mortgage loan to determine whether to apply additional
consumer protections, in recognition of the lower risk generally posed
by lower-priced mortgages. A price-based General QM loan definition
would be consistent with these existing provisions that provide greater
protections to consumers with more expensive loans. For example, TILA
and Regulation Z use a loan's APR in comparison to APOR and as one
trigger for heightened consumer protections for certain ``high-cost
mortgages'' pursuant to HOEPA.\202\ Loans that meet HOEPA's high-cost
trigger are subject to special disclosure requirements and restrictions
on loan terms, and consumers with high-cost mortgages have enhanced
remedies for violations of the law. Further, in 2008, the Board
exercised its authority under HOEPA to require certain consumer
protections concerning a consumer's ability to repay, prepayment
penalties,
---------------------------------------------------------------------------
\202\ See TILA section 103(aa)(i); Regulation Z Sec.
1026.32(a)(1)(i). TILA and Regulation Z also provide a separate
price-based coverage trigger based on the points and fees charged on
a loan. See TILA section 130(aa)(ii); Regulation Z Sec.
1026.32(a)(1)(ii).
---------------------------------------------------------------------------
[[Page 41735]]
and escrow accounts for taxes and insurance for a category of ``higher-
priced mortgage loans,'' which have APR spreads lower than those
prescribed for high-cost mortgages but that nevertheless exceed APOR by
a specified threshold.\203\ Although the ATR/QM Rule replaced the
ability-to-repay requirements promulgated pursuant to HOEPA and the
Board's 2008 rule,\204\ higher-priced mortgage loans remain subject to
additional requirements related to escrow accounts for taxes and
homeowners insurance and to appraisal requirements.\205\ The ATR/QM
Rule itself provides additional protection to QMs that are higher-
priced covered transactions, as defined in Sec. 1026.43(b)(4), in the
form of a rebuttable presumption of compliance with the ATR provisions,
instead of a conclusive safe harbor.
---------------------------------------------------------------------------
\203\ 73 FR 44522 (July 30, 2008).
\204\ The Board's 2008 rule was superseded by the January 2013
Final Rule, which imposed ability to repay requirements on a broader
range of closed-end consumer credit transactions secured by a
dwelling. See generally 78 FR 6407 (Jan. 30, 2013).
\205\ See Sec. 1026.35(b) and (c).
---------------------------------------------------------------------------
Finally, the Bureau preliminarily concludes that a price-based
General QM loan definition would provide compliance certainty to
creditors, since creditors would be able to readily determine whether a
loan is a General QM loan. Creditors have experience with APR
calculations due to the existing price-based regulatory requirements
described above, and for various other disclosure and compliance
reasons under Regulation Z. Creditors also have experience determining
the appropriate APOR for use in calculating rate spreads. As such, the
Bureau believes this approach would provide certainty to creditors
regarding a loan's status as a QM.\206\
---------------------------------------------------------------------------
\206\ The Bureau understands from feedback that creditors are
concerned about errors in DTI calculations and have previously
requested that the Bureau permit a cure of DTI overages that are
discovered after consummation. See 79 FR 25730, 25743-45 (May 6,
2014) (requesting comment on potential cure or correction provisions
for DTI overages).
---------------------------------------------------------------------------
Although the proposal would require creditors to consider the
consumer's income, debt, and DTI ratio or residual income, the proposal
would not provide a specific DTI limit. For the reasons discussed below
in the section-by-section analysis of Sec. 1026.43(e)(2)(v)(A), the
Bureau preliminarily concludes that it is appropriate to remove current
appendix Q and instead provide creditors additional flexibility for
defining ``debt'' and ``income.'' Therefore, the Bureau is not
proposing to provide a single, specific set of standards equivalent to
appendix Q for what must be counted as debt and what may be counted as
income for purposes of proposed Sec. 1026.43(e)(2)(v)(A). For purposes
of this proposed requirement, income and debt would be determined in
accordance with proposed Sec. 1026.43(e)(2)(v)(B), which requires the
creditor to verify the consumer's current or reasonably expected income
or assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan, and the
consumer's current debt obligations, alimony, and child support. The
proposed rule would provide a safe harbor to creditors using
verification standards the Bureau specifies. This could potentially
include relevant provisions from Fannie Mae's Single Family Selling
Guide, Freddie Mac's Single-Family Seller/Servicer Guide, FHA's Single
Family Housing Policy Handbook, the VA's Lenders Handbook, and the
Field Office Handbook for the Direct Single Family Housing Program and
Handbook for the Single Family Guaranteed Loan Program of the U.S.
Department of Agriculture (USDA), current as of the proposal's public
release. However, under the proposal, creditors would not be required
to verify income and debt according to the standards the Bureau
specifies. Rather, the proposed rule would also provide creditors with
the flexibility to develop other methods of compliance with the
verification requirements.
Under the proposal, a loan would meet the General QM loan
definition in Sec. 1026.43(e)(2) only if the APR exceeds APOR for a
comparable transaction by less than two percentage points as of the
date the interest rate is set. As described below in the section-by-
section analysis of Sec. 1026.43(e)(2)(vi), the Bureau tentatively
concludes that this threshold would strike an appropriate balance
between ensuring that loans receiving QM status may be presumed to
comply with the ATR provisions and ensuring that access to responsible,
affordable mortgage credit remains available to consumers. For these
same reasons, the Bureau is proposing higher thresholds for smaller
loans and subordinate-lien transactions, as the Bureau is concerned
that loans with lower loan amounts may be priced higher than larger
loans, even when the consumers have similar credit characteristics and
a similar ability to repay. For all loans, regardless of loan size, the
Bureau is not proposing to alter the current threshold separating safe
harbor from rebuttable presumption QMs in Sec. 1026.43(b)(4), under
which a loan is a safe harbor QM if its APR exceeds APOR for a
comparable transaction by less than 1.5 percentage points as of the
date the interest rate is set. As such, loans that otherwise meet the
General QM loan definition and for which the APR exceeds APOR by 1.5 or
more percentage points (but by less than 2 percentage points) as of the
date the interest rate is set would receive a rebuttable presumption of
compliance with the ATR provisions. This approach is discussed further,
below.
Finally, the Bureau notes its analysis of the potential effects on
access to credit of a price-based approach to defining a General QM
loan. As indicated by the various combinations in Table 7 below, 2018
HMDA data show that under the current rule--including the Temporary GSE
QM loan definition, the General QM loan definition with a 43 percent
DTI limit, and the Small Creditor QM loan definition in Sec.
1026.43(e)(5)--90.6 percent of conventional purchase loans were safe
harbor QM loans and 95.8 percent were safe harbor QM or rebuttable
presumption QM loans. Under the proposed General QM rate spread
thresholds of 1.5 (safe harbor) and 2 (rebuttable presumption)
percentage points over APOR, which are described further, below, 91.6
percent of conventional purchase loans would have been safe harbor QM
loans and 96.1 percent would have been safe harbor QM or rebuttable
presumption QM loans.\207\ Based on these 2018 data, rate spread
thresholds of 1-2 percentage points over APOR for safe harbor QM loans
would have covered 83.3 to 94.1 percent of the conventional purchase
market (as safe harbor QM loans), while rate spread thresholds of 1.5-
2.5 percentage points over APOR for rebuttable presumption QM loans
would have covered 94.3 to 96.8 percent of the conventional purchase
market (as safe harbor and rebuttable presumption QM loans).
---------------------------------------------------------------------------
\207\ All estimates in Table 7 include loans that meet the Small
Creditor QM loan definition in Sec. 1026.43(e)(5). In particular,
loans originated by small creditors that meet the criteria in Sec.
1026.43(e)(5) are safe harbor QM loans if priced below 3.5
percentage points over APOR or are rebuttable presumption QM loans
if priced 3.5 percentage points or more over APOR.
[[Page 41736]]
Table 7--Share of 2018 Conventional First-Lien Purchase Loans Within
Various Price-Based Safe Harbor (SH) QM and Rebuttable Presumption (RP)
QM Definitions (HMDA Data)
------------------------------------------------------------------------
Safe harbor QM QM overall
(share of (share of
Approach conventional conventional
purchase market) purchase market)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43......... 90.6 95.8
Proposal (SH 1.50, RP 2.00)....... 91.6 96.1
SH 0.75, RP 1.50.................. 74.6 94.3
SH 1.00, RP 1.50.................. 83.3 94.3
SH 1.25, RP 1.75.................. 88.4 95.3
SH 1.35, RP 2.00.................. 89.8 96.1
SH 1.40, RP 2.00.................. 90.5 96.1
SH 1.75, RP 2.25.................. 93.1 96.6
SH 2.00, RP 2.50.................. 94.1 96.8
------------------------------------------------------------------------
Despite the expected benefits of a price-based General QM loan
definition, the Bureau acknowledges concerns about the approach. First,
while the Bureau believes a loan's price may be a more holistic and
flexible measure of a consumer's ability to repay than DTI alone, the
Bureau recognizes that there is a distinction between credit risk,
which largely determines pricing relative to the prime rate, and a
particular consumer's ability to repay, which is one component of
credit risk. Pricing is based on creditors' expected net revenues
(i.e., whether a creditor will earn interest payments and recover the
outstanding principal balance in the event of default). While a
consumer's ability to afford loan payments is an important component of
pricing, the loan's price will reflect additional factors related to
the loan that may not in all cases be probative of the consumer's
repayment ability. As noted above, the proposal includes a requirement
to consider the consumer's DTI ratio or residual income as part of the
General QM loan definition, and to verify the debt and income used to
calculate DTI or residual income, because the Bureau believes these are
important factors in assessing a consumer's ability to repay. These
requirements are discussed further below and in the section-by-section
analysis of Sec. 1026.43(e)(2)(v).
The Bureau also acknowledges that factors unrelated to the
individual loan can influence its price. Institutional factors, such as
the competing policy considerations inherent in setting guarantee fees
on GSE loans, can influence mortgage pricing independently of credit
risk or ability to repay and would have some effect on which loans
would be priced under the proposed General QM loan pricing threshold.
The price-based approach also shifts the QM determination from a DTI
calculation, which is relatively consistent across creditors and over
time, to one which is more variable. An identical loan to a consumer
with the same risk profile might satisfy the requirements of the
General QM loan definition at one point in time but not at another
since APOR will change over time. The Bureau also anticipates that a
price-based approach would incentivize some creditors to price some
loans just below the threshold so that the loans will receive the
presumption of compliance that comes with QM status. While the Bureau
acknowledges these criticisms of a price-based approach, the Bureau's
delinquency analyses and the analyses by external parties discussed
above provide evidence that rate spreads are correlated with
delinquency.
Finally, the Bureau is aware of concerns about the sensitivity of a
price-based QM definition to macroeconomic cycles. In particular, the
Bureau is aware of concerns that the price-based approach would be a
dynamic, trailing indicator of risk and could be pro-cyclical. For
example, during periods of economic expansion, increasing house prices
and strong demand from consumers with weaker credit characteristics
often lead to greater availability of credit, as secondary market
investors expect minimal losses, regardless of whether the consumer
defaults, due to increasing collateral values. This may result in an
underpricing of credit risk. To the extent that occurs, rate spreads
over APOR would compress and additional higher-priced, higher-risk
loans would fit within the proposed General QM loan definition.
Further, during periods of economic downturn, investors' demand for
mortgage credit may fall as they seek safer investments to limit losses
in the event of a broader economic decline. This may result in
creditors reducing the availability of mortgage credit to riskier
borrowers, through credit overlays and price increases, to protect
against the risk that creditors may be unable to sell the loans
profitably in the secondary markets, or even sell the loans at all.
While APOR would also increase during periods of economic stress and
low secondary market liquidity, consumers with riskier credit
characteristics may see disproportionate pricing increases relative to
the increases in a more normal economic environment. These effects
would likely make price-based QM standards pro-cyclical, with a more
expansive QM market when the economy is expanding, and a more
restrictive QM market when credit is tight. As a result, a rate spread-
based QM threshold would likely be less effective in limiting risky
loans during periods of strong housing price growth or encouraging safe
loans during periods of weak housing price growth. The Bureau is
particularly concerned about these potential effects given the recent
economic disruptions associated with the COVID-19 pandemic. As
described in part V.E below, the Bureau is requesting comment on an
alternative, DTI-based approach. Unlike a price-based approach, a DTI-
based approach would be counter-cyclical, because of the positive
correlation between interest rates and DTI ratios. The alternative
proposal is discussed in detail in part V.E.
As noted above, stakeholders have suggested a range of options to
replace the 43 percent DTI limit in the General QM loan definition. The
Bureau has considered these options in developing this proposed rule
but is not providing specific proposals for these alternatives because
the Bureau has preliminarily concluded that the price-based approach in
proposed Sec. 1026.43(e)(2) would best achieve the statutory goals of
ensuring consumers' ability to repay and maintaining access to
responsible, affordable, mortgage credit. For example, some
stakeholders have suggested that the Bureau rely only on the statutory
QM loan restrictions (i.e.,
[[Page 41737]]
prohibitions on certain loan features, requirements for underwriting,
and a limitation on points and fees) to define a General QM loan. The
Bureau is not proposing this approach because it is concerned that such
an approach, which would define a General QM loan without either a
direct or indirect measure of the consumer's finances, may not
adequately ensure that consumers have a reasonable ability to repay
their loans according to the loan terms.
Other stakeholders have suggested that the Bureau retain DTI as
part of the General QM loan definition, but with modifications to the
current rule. Some stakeholders have advocated for increasing the DTI
limit to some other percentage to address concerns that the 43 percent
DTI limit is too restrictive and may exclude consumers for whom it
might be appropriate to presume ability to repay for their loans at
consummation. Another stakeholder suggested a hybrid approach that
would eliminate the DTI limit only for loans below a set pricing
threshold, such that less expensive loans could obtain General QM loan
status by meeting the statutory QM factors and more expensive loans
could be General QM loans only if the consumer's DTI ratio is below a
set threshold. This stakeholder suggests that more expensive loans pose
greater risks to consumers, so it is critical to include a DTI limit
for such loans. The Bureau recognizes these concerns and, as explained
in part V.E, below, is requesting comment on whether an alternative
approach that adopts a higher DTI limit or a hybrid approach that
combines pricing and a DTI limit, along with a more flexible standard
for defining debt and income, could provide a superior alternative to
the price-based approach. In particular, the Bureau is requesting
comment on whether such an approach would adequately balance
considerations related to ensuring consumers' ability to repay and
maintaining access to credit, which are described above.
Other stakeholders have advocated for granting QM status to loans
with DTI ratios above a prescribed limit if certain compensating
factors are present, such as credit score, LTV ratio, and cash
reserves. Similarly, another stakeholder suggested the Bureau define
General QM loans by reference to a multi-factor approach that combines
DTI ratio, LTV ratio, and credit score. The Bureau is concerned about
the complexity of these approaches. In particular, these approaches
would present the same challenges with defining debt and income
described above and would also require the Bureau to define
compensating factors and set applicable thresholds for those factors.
The Bureau is concerned that incorporating compensating factors into
the General QM loan definition would not provide creditors adequate
certainty about whether a loan satisfies the requirements of the
General QM loan definition, given that it would be difficult to create
a bright-line rule that incorporates a range of compensating factors.
Further, the Bureau is concerned that a rule that incorporates only a
few compensating factors might cause the market to over-emphasize those
factors over others that might be equally predictive of a consumer's
ability to repay, potentially stifling innovation and limiting access
to credit. The Bureau has decided not to propose an approach that would
combine a specific DTI limit with compensating factors.
The Bureau also acknowledges that some stakeholders have requested
that the Bureau make the Temporary GSE QM loan definition permanent.
The Bureau is not proposing this alternative because it is concerned
that there is not a basis to presume for an indefinite period that
loans eligible to be purchased or guaranteed by the GSEs--whether or
not the GSEs are under conservatorship--have been originated with
appropriate consideration of consumers' ability to repay. Making the
Temporary GSE QM loan definition permanent could stifle innovation and
the development of competitive private-sector approaches to
underwriting. The Bureau is also concerned that, as long as the
Temporary GSE QM loan definition continues in effect, the non-GSE
private market is less likely to rebound, and that the existence of the
Temporary GSE QM loan definition may be contributing to the continuing
limited non-GSE private market.
The Bureau requests comment on all aspects of the proposal to
remove the General QM loan definition's specific DTI limit in Sec.
1026.43(e)(2)(vi) and replace it with a with a price-based threshold.
In particular, the Bureau requests comment, including data or other
analysis, on whether pricing is predictive of loan performance and
whether the Bureau should consider other requirements, in addition to a
price-based threshold, as part of the General QM loan definition. The
Bureau also requests comment on whether and to what extent the private
market would provide access to credit by originating responsible,
affordable mortgages that would no longer receive QM status when the
Temporary GSE QM loan definition expires, including loans with DTI
ratios above 43 percent. In addition, in light of the concerns about
the sensitivity of a price-based QM definition to macroeconomic cycles,
the Bureau requests comment on whether it should consider adjusting the
pricing thresholds in emergency situations and, if so, how the Bureau
should do so. The Bureau also requests comment on how revisions to the
General QM loan definition can support innovations in underwriting that
would facilitate access to credit, while ensuring that loans granted QM
status are those that should be presumed to comply with the ATR
provisions.
As noted, the Bureau is proposing to require a creditor to consider
a consumer's monthly DTI ratio or residual income, which the Bureau
believes would help ensure that QMs remain within a consumer's ability
to repay without the need to set a specific DTI limit. However, as
discussed in more detail in part V.E below, the Bureau also
specifically requests comment on whether, instead of or in addition to
a price-based threshold, the rule should retain a DTI limit as part of
the General QM loan definition or to determine which loans receive a
safe harbor or a rebuttable presumption of compliance.
D. The QM Presumption of Compliance Under a Price-Based QM Definition
The Bureau is not proposing to alter the approach in the current
ATR/QM Rule of providing a conclusive presumption of compliance (i.e.,
a safe harbor) to loans that meet the General QM loan requirements in
Sec. 1026.43(e)(2) and for which the APR exceeds APOR for a comparable
transaction by less than 1.5 percentage points as of the date the
interest rate is set. Loans that meet the General QM loan requirements
in Sec. 1026.43(e)(2), including the pricing thresholds in Sec.
1026.43(e)(2)(vi), and for which the APR exceeds APOR for a comparable
transaction by 1.5 percentage points or more as of the date the
interest rate is set would receive a rebuttable presumption of
compliance. Therefore, a loan that otherwise meets the General QM loan
definition would receive a rebuttable presumption of compliance with
the ATR provisions if the APR exceeds APOR between 1.5 percentage
points and less than 2 percentage points as of the interest rate is
set. The proposal would provide a rebuttable presumption of compliance
up to a higher pricing threshold for smaller loans, depending on the
loan amount, and for subordinate-lien transactions, as described
further in the section-by-section analysis of Sec. 1026.43(e)(2)(vi).
[[Page 41738]]
Under the ATR/QM Rule, a creditor that makes a QM loan receives
either a rebuttable or conclusive presumption of compliance with the
ATR provisions, depending on whether the loan is a higher-priced
covered transaction. The Rule generally defines higher-priced covered
transaction in Sec. 1026.43(b)(4) to mean a first-lien mortgage with
an APR that exceeds APOR for a comparable transaction as of the date
the interest rate is set by 1.5 or more percentage points; or a
subordinate-lien transaction with an APR that exceeds APOR for a
comparable transaction as of the date the interest rate is set by 3.5
or more percentage points.\208\ The Rule provides in Sec.
1026.43(e)(1)(i) that a creditor that makes a QM loan that is not a
higher-priced covered transaction is entitled to a safe harbor from
liability under the ATR provisions. Under Sec. 1026.43(e)(1)(ii), a
creditor that makes a QM loan that is a higher-priced covered
transaction is entitled to a rebuttable presumption that the creditor
has complied with the ATR provisions.
---------------------------------------------------------------------------
\208\ Section 1026.43(b)(4) also provides that a first-lien
covered transaction that is a QM under Sec. 1026.43(e)(5), (e)(6),
or Sec. 1026.43(f) is ``higher priced'' if its APR is 3.5
percentage points or more above APOR.
---------------------------------------------------------------------------
In developing the approach to the presumptions of compliance for
QMs in the January 2013 Final Rule, the Bureau first considered whether
the statute prescribes if QM loans receive a conclusive or rebuttable
presumption of compliance with the ATR provisions. As discussed above,
TILA section 129C(b) provides that loans that meet certain requirements
are ``qualified mortgages'' and that creditors making QMs ``may
presume'' that such loans have met the ATR requirements. However, the
statute does not specify whether the presumption of compliance means
that the creditor receives a conclusive presumption or a rebuttable
presumption of compliance with the ATR provisions. The Bureau noted
that its analysis of the statutory construction and policy implications
demonstrates that there are sound reasons for adopting either
interpretation.\209\ 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.\210\ The Bureau interpreted the statute to provide for a
rebuttable presumption of compliance with the ATR provisions but used
its adjustment and exception authority to establish a conclusive
presumption of compliance for loans that are not ``higher-priced
covered transactions.'' \211\
---------------------------------------------------------------------------
\209\ 78 FR 6408, 6507 (Jan. 30, 2013).
\210\ Id. at 6511.
\211\ Id. at 6514.
---------------------------------------------------------------------------
In the January 2013 Final Rule, the Bureau identified several
reasons why loans that are not higher-priced loans (generally prime
loans) should receive a safe harbor. The Bureau noted that the fact
that a consumer receives a prime rate is itself indicative of the
absence of any indicia that would warrant a loan level price
adjustment, and thus is suggestive of the consumer's ability to
repay.\212\ The Bureau noted that prime rate loans have performed
significantly better historically than subprime loans and that the
prime segment of the market has been subject to fewer abuses.\213\ The
Bureau noted that the QM requirements will ensure that the loans do not
contain certain risky product features and are underwritten with
careful attention to consumers' DTI ratios.\214\ The Bureau also noted
that a safe harbor provides greater legal certainty for creditors and
secondary market participants and may promote enhanced competition and
expand access to credit.\215\ The Bureau determined that if a loan met
the product and underwriting requirements for QM and was not a higher-
priced covered transaction, there are sufficient grounds for concluding
that the creditor satisfied the ATR provisions.\216\
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\212\ Id. at 6511.
\213\ Id.
\214\ Id.
\215\ Id.
\216\ Id.
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The Bureau in the January 2013 Final Rule pointed to factors to
support its decision to adopt a rebuttable presumption for QMs that are
higher-priced covered transactions. The Bureau noted that QM
requirements, including the restrictions on product features and the 43
percent DTI limit, would help prevent the return of the lax lending
practices prevalent in the years before the financial crisis, but that
it is not possible to define by a bright-line rule a class of mortgages
for which each consumer will have ability to repay, particularly for
subprime loans.\217\ The Bureau noted that subprime pricing is often
the result of loan level price adjustments established by the secondary
market and calibrated to default risk.\218\ The Bureau also noted that
consumers in the subprime market tend to be less sophisticated and have
fewer options and thus are more susceptible to predatory lending
practices.\219\ The Bureau noted that subprime loans have performed
considerably worse than prime loans.\220\ The Bureau therefore
concluded that QMs that are higher-priced covered transactions would
receive a rebuttable presumption of compliance with the ATR provisions.
The Bureau recognized that this approach could modestly increase the
litigation risk for subprime QMs but did not expect that imposing a
rebuttable presumption for higher-priced QMs would have a significant
impact on access to credit.\221\
---------------------------------------------------------------------------
\217\ Id.
\218\ Id.
\219\ Id.
\220\ Id.
\221\ Id. at 6511-13.
---------------------------------------------------------------------------
The Bureau is not proposing to alter this general approach to the
presumption of compliance. Specifically, the Bureau is not proposing to
amend the approach under the current rule, in which General QM loans
that are higher-priced covered transactions (up to the pricing
thresholds set out in proposed Sec. 1026.43(e)(2)(vi)) receive a
rebuttable presumption of compliance with the ATR requirements and
General QM loans that are not higher-priced covered transactions
receive a safe harbor. As discussed above, the Bureau has preliminarily
concluded that pricing is strongly correlated with loan performance and
that pricing thresholds should be included in the General QM loan
definition in Sec. 1026.43(e)(2). The Bureau preliminarily concludes
that for prime loans, the pricing, in conjunction with the revised QM
requirements in proposed Sec. 1026.43(e)(2), provides sufficient
grounds for supporting a conclusive presumption that the creditor
complied with the ATR requirements. The Bureau recognizes that the
January 2013 Final Rule relied in part on the 43 percent DTI limit to
support its conclusion that a safe harbor is appropriate for QMs that
are not higher-priced covered transactions. However, the Bureau
believes that a specific DTI limit may not be necessary to support a
decision to preserve the conclusive presumption, provided that the
pricing threshold identified for the conclusive presumption is
sufficiently low. As noted above, pricing is strongly correlated with
loan performance, and the specific 43 percent DTI limit has been
problematic, both because of the difficulties of calculating DTI with
appendix Q and because, while DTI ratios in general may also be
correlated with loan performance, the bright-line 43 percent threshold
may unduly restrict access to credit for some consumers for whom it
might be appropriate to presume ability to repay at consummation.
Further, under the proposed price-based approach, creditors would be
required to consider
[[Page 41739]]
DTI or residual income for a loan to satisfy the requirements of the
General QM loan definition. Moreover, the other factors noted above
appear to continue supporting a safe harbor for prime QMs, including
the better performance of prime loans compared to subprime loans, and
the potential benefits of greater competition and access to credit from
the greater certainty and reduced litigation risk arising from a safe
harbor.
The Bureau is not proposing to alter the current safe harbor
thresholds for General QM loans under Sec. 1026.43(e)(2). Under
current Sec. 1026.43(b)(4) and (e)(1)(i), a first-lien transaction
that is a General QM loan under Sec. 1026.43(e)(2) receives a safe
harbor from liability under the ATR provisions if a loan's APR exceeds
APOR for a comparable transaction by less than 1.5 percentage points as
of the date the interest rate is set. Current paragraphs (b)(4) and
(e)(1)(i) of Sec. 1026.43 provide a separate safe harbor threshold of
3.5 percentage points for subordinate-lien transactions. The Bureau is
also not proposing to amend that threshold.\222\
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\222\ As noted above, the Bureau is not proposing to alter the
higher threshold of 3.5 percentage points over APOR for small
creditor portfolio QMs and balloon-payment QMs made by certain small
creditors pursuant to Sec. 1026.43(e)(5), (e)(6) and (f). See Sec.
1026.43(b)(4).
---------------------------------------------------------------------------
As explained above, the Bureau's January 2013 Final Rule generally
viewed loans with APRs that did not exceed APOR by more than 1.5
percentage points (and 3.5 percentage points for subordinate-lien
transactions) to be prime loans which, if the loan satisfies the
criteria to be a QM, may be conclusively presumed to comply with the
ATR provisions. In support of providing a conclusive presumption of
compliance to prime loans, the Bureau cited the absence of loan level
price adjustments for those loans (which the Bureau viewed as
indicative of the consumer's ability to repay), the historical
performance of prime rate loans compared to subprime loans, and
historically fewer abusive practices in the prime market.\223\ With
respect to the specific thresholds chosen to separate safe harbor from
rebuttable presumption QM loans, the Bureau in the January 2013 Final
Rule noted that the line it was drawing had long been recognized as a
rule of thumb to separate prime loans from subprime loans.\224\ The 1.5
percentage point above APOR threshold is the same as that used in the
Board's 2008 HOEPA Final Rule, described above, which was amended by
the Board's 2011 Jumbo Loans Escrows Final Rule to include a separate
threshold for jumbo loans for purposes of certain escrows
requirements.\225\ Subsequently, the Dodd-Frank Act adopted these same
thresholds in TILA section 129C(a)(6)(D)(ii)(II), which provides that a
creditor making a balloon-payment loan with an APR at or above certain
thresholds must determine ability to repay using the contract's
repayment schedule.\226\ The Bureau concluded that a 1.5 percentage
point threshold for first-lien QMs and 3.5 percentage point threshold
for subordinate-lien QMs balanced competing consumer protection and
access to credit considerations.\227\ The Bureau also concluded that it
was not appropriate to extend the safe harbor to first-lien loans above
those thresholds because that approach would provide insufficient
protection to consumers in loans with higher interest rates who may
require greater protection than consumers in prime rate loans.\228\
---------------------------------------------------------------------------
\223\ 78 FR 6408, 6511 (Jan. 30, 2013).
\224\ Id. at 6408.
\225\ Id. at 6451; see also 76 FR 11319 (Mar. 2, 2011) (2011
Jumbo Loans Escrows Final Rule).
\226\ 78 FR 6408, 6451 (Jan. 30, 2013).
\227\ Id. at 6514.
\228\ Id.
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For the reasons set forth below, the Bureau is not proposing to
alter the safe harbor threshold of 1.5 percentage points for first-lien
General QM loans under the price-based approach in proposed Sec.
1026.43(e)(2). The Bureau tentatively concludes that the current safe
harbor threshold of 1.5 percentage points for first liens is
appropriate to restrict safe harbor QMs to lower-priced, generally less
risky, loans while ensuring that responsible, affordable credit remains
available to consumers. The Bureau generally believes these same
considerations support not changing the current safe harbor threshold
of 3.5 percentage points for subordinate-lien transactions, which
generally perform better and have stronger credit characteristics than
first-lien transactions. The Bureau's proposal to address subordinate-
lien transactions is discussed further below in the section-by-section
analysis of Sec. 1026.43(e)(2)(vi).
As explained above, the Bureau uses early delinquency rates as a
proxy for measuring whether a consumer had ability to repay at the time
the mortgage loan was originated. Here, the Bureau analyzed early
delinquency rates in considering whether it should propose to revise
the threshold for first-lien safe harbor General QM loans under the
proposed price-based approach; that is, which first-lien General QM
loans should be conclusively presumed to comply with the ATR provisions
in the absence of a specific DTI limit. As noted above, the January
2013 Final Rule relied in part on the 43 percent DTI limit to support
its conclusion that a safe harbor is appropriate for QMs that are not
higher-priced covered transactions. Under the proposal to replace the
current 43 percent DTI limit with a price-based approach, some loans
with DTI ratios above 43 percent will receive safe harbor QM status.
The Bureau compared projected early delinquency rates under the
General QM loan definition with and without a 43 percent DTI limit
under a range of potential rate-spread based safe harbor thresholds.
Under the current 43 percent DTI limit for first-lien General QM loans,
Table 5 (2002-2008), above, indicates early delinquency rates for loans
with rate spreads just below 1.5 percentage points increase with DTI,
from 6 percent for loans with a DTI ratio of 20 percent or below to 11
percent for loans with DTI ratios from 41 to 43 percent. For loans with
rate spreads just below 1.5 percentage points and DTI ratios above 43
percent, Table 5 indicates early delinquency rates between 12 percent
(for loans with 44 to 45 percent DTI ratios) and 15 percent (for loans
with DTI ratios of 61 to 70 percent). The loans at that rate spread
with DTI ratios above 43 percent in Table 5 are loans that are not QMs
under the current General QM loan definition in Sec. 1026.43(e)(2)
because of the 43 percent DTI limit, but that would be QMs under the
proposed General QM loan definition in Sec. 1026.43(e)(2) in the
absence of the 43 percent DTI limit. Therefore, the loans that would be
newly granted safe harbor status under the proposed price-based
approach at a safe harbor threshold of 1.5 percentage points are likely
to have a somewhat higher early delinquency rate than those just at or
below 43 percent DTI ratios, 12 to 15 percent versus 11 percent. The
comparable early delinquency rates for 2018 loans from Table 6 also
show a slightly higher early delinquency rate for DTI ratios above 43
percent compared to loans with DTI ratios of 36 to 43 percent: 2.3
percent versus 1.5 percent.
The Bureau acknowledges that removing the 43 percent DTI limit
while retaining a 1.5 percentage point safe harbor threshold would lead
to somewhat higher-risk loans obtaining safe harbor QM status relative
to loans within the current General QM loan definition. However, Bureau
analysis shows the early delinquency rate for this set of loans is on
par with loans that have received safe harbor QM status under the
Temporary GSE QM loan definition. Restricting the sample of 2018 NMDB-
HMDA matched first-lien
[[Page 41740]]
conventional purchase originations to only those purchased and
guaranteed by the GSEs, loans with DTI ratios above 43 and rate spreads
between 1 and 1.49 percentage points had an early delinquency rate of
2.4 percent.\229\ Consequently, the Bureau does not believe that the
price-based alternative would result in substantially higher
delinquency rates than the standard included in the current rule.
---------------------------------------------------------------------------
\229\ This comparison uses 2018 data on GSE originations because
such loans were originated while the Temporary GSE QM loan
definition was in effect and the GSEs were in conservatorship. GSE
loans from the 2002 to 2008 period were originated under a different
regulatory regime and with different underwriting practices (e.g.,
GSE loans more commonly had DTI ratios over 50 percent during the
2002 to 2008 period), and thus may not be directly comparable to
loans made under the Temporary GSE QM loan definition.
---------------------------------------------------------------------------
The Bureau also considered continued access to responsible,
affordable mortgage credit in deciding not to propose revisions to the
current 1.5 percentage point safe harbor threshold. The Bureau is
concerned that a safe harbor threshold lower than 1.5 percentage points
could reduce access to credit, as some loans that are General QM loans
under current Sec. 1026.43(e)(2) and receive a safe harbor would
instead receive a rebuttable presumption of compliance under proposed
Sec. 1026.43(e)(2). HMDA data analyzed by the Bureau in the Assessment
Report suggest that the safe harbor threshold of 1.5 percentage points
has not constrained lenders, as the share of originations above the
threshold remained steady after the implementation of the ATR/QM
Rule.\230\ However, the Report noted that these results are likely
explained by the fact that, since the Board's issuance of a rule in
2008, an ability-to-repay requirement has applied to a category of
mortgage loans that is substantially the same as rebuttable presumption
QMs under the January 2013 Final Rule.\231\ The Bureau is concerned
about the potential effects on access to credit if the threshold is
lowered, as loans that are newly subject to the rebuttable presumption
rather than the safe harbor may cost materially more to consumers. For
example, the Bureau is concerned that some loans that would have been
originated as conventional mortgages may instead be originated as FHA
loans, which the Bureau expects would cost materially more for many
consumers. The Bureau expects that a safe harbor threshold of 1.5
percentage points over APOR for first liens under a price-based General
QM loan definition would not have an adverse effect on access to
credit. In particular, the Bureau estimates that the size of the safe
harbor QM market would be comparable to the size of that market with
the Temporary GSE QM loan definition in place and may expand slightly
under the proposed amendments to the General QM loan definition in
Sec. 1026.43(e)(2), if the rule retains the current safe harbor
threshold.\232\
---------------------------------------------------------------------------
\230\ Assessment Report, supra note 58, section 5.5, at 187.
\231\ Id. at 182. The Assessment Report explained that because
of their nearly identical definitions, higher-priced mortgage loans
(HPMLs) may serve as a proxy for higher-priced covered transactions
under the ATR/QM Rule in analysis of HMDA data.
\232\ The Bureau estimates that 90.9 percent of conventional
purchase loans in 2018 HMDA data fell within safe harbor QM status
under the current rule with the Temporary GSE QM loan definition.
The Bureau estimates that under the proposed changes to the General
QM loan definition in Sec. 1026.43(e)(2), 91.9 percent of those
conventional purchase loans would have had safe harbor QM status if
the current safe harbor threshold of 1.5 percentage points remains
in place. Therefore, the Bureau expects that the proposed changes
would result in a comparable, or somewhat increased, portion of the
QM share of the market that would be protected by the safe harbor.
---------------------------------------------------------------------------
As discussed above and in the January 2013 Final Rule, TILA does
not plainly mandate either a safe harbor or a rebuttable presumption
approach to a QM presumption of compliance.\233\ With respect to
General QM prime loans (General QM loans with an APR that does not
exceed APOR by 1.5 or more percentage points for first liens), the
Bureau preliminarily concludes that it is appropriate to use its
adjustment authority under TILA section 105(a) to retain a conclusive
presumption (i.e., a safe harbor). The Bureau preliminarily concludes
that this approach would balance the competing consumer protection and
access to credit considerations described above. The Bureau
acknowledges that, under the price-based approach in proposed Sec.
1026.43(e)(2), General QM loans would not be limited to those with DTI
ratios that do not exceed 43 percent, as is the case under the current
rule. However, the Bureau preliminarily concludes that it remains
appropriate to provide a safe harbor to these loans. The Bureau has
recognized that receipt of a prime rate is suggestive of a consumer's
ability to repay.\234\ Further, the Bureau notes that proposed Sec.
1026.43(e)(2)(v) would impose new requirements for the creditor to
consider the consumer's income, debt, and monthly debt-to-income ratio
or residual income to satisfy the General QM loan definition, thus
retaining a requirement that the creditor consider key aspects of the
consumer's financial capacity. The Bureau is not proposing to extend
the safe harbor to higher-priced loans because the Bureau preliminarily
concludes that such an approach would provide insufficient protection
to consumers in loans with higher interest rates who may require
greater protection than consumers in prime rate loans. The Bureau
preliminarily concludes that providing a safe harbor for prime 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.
---------------------------------------------------------------------------
\233\ 78 FR 6408, 6513 (Jan. 30, 2013).
\234\ Id. at 6511.
---------------------------------------------------------------------------
The Bureau requests comment on whether the rule should retain the
current thresholds separating safe harbor from rebuttable presumption
General QM loans and specifically requests feedback on whether the
Bureau should adopt higher or lower safe harbor thresholds. The Bureau
encourages commenters to suggest specific rate spread thresholds for
the safe harbor. In particular, the Bureau requests comment on whether
it may be appropriate to set the safe harbor threshold for first-lien
transactions lower than 1.5 percentage points over APOR in light of the
comparatively lower delinquency rates associated with high-DTI loans at
lower rate spreads, as reflected in Tables 5 and 6.
The Bureau acknowledges that adopting a threshold below 1.5
percentage points over APOR could have some negative impact on access
to credit, as some loans that are General QM loans under current Sec.
1026.43(e)(2) and receive a safe harbor would instead receive a
rebuttable presumption of compliance under proposed Sec.
1026.43(e)(2). The Bureau similarly requests comment on whether it may
be appropriate to set the safe harbor threshold for first liens higher
than 1.5 percentage points over APOR. The Bureau acknowledges that some
commenters to the ANPR suggested that the current safe harbor threshold
is too low and may have an adverse impact on access to credit,
including for minority consumers. At the same time, the Bureau notes
its concern about higher early delinquency rates at higher safe harbor
thresholds and is concerned that such an approach might result in safe
harbors for loans for which it would not be appropriate to presume
conclusively that consumers have a reasonable ability to repay their
loans according to the loan terms. The Bureau requests comment on
whether a safe harbor threshold of 2 percentage points over APOR would
balance considerations regarding access to credit and ability to repay.
For commenters that recommend a safe harbor threshold higher than 1.5
[[Page 41741]]
percentage points over APOR (such as a 2-percentage point threshold),
the Bureau requests comment on an appropriate threshold to separate QM
loans from non-QM loans. As discussed in the section-by-section
analysis of Sec. 1026.43(e)(2)(vi), below, the Bureau is proposing
that loans with rate spreads between 1.5 and less than 2 percentage
points over APOR receive a rebuttable presumption of compliance with
the ATR provisions, and that loans with rate spreads of 2 percentage
points over APOR or higher would not meet the General QM loan
definition. Commenters are encouraged to provide data or other material
to support their recommendations, as well as suggestions for commentary
that would assist in understanding the application of the thresholds.
With respect to General QM loans that are higher-priced covered
transactions the Bureau preliminarily concludes that such loans should
receive a rebuttable presumption of compliance with the ATR
requirements. Such loans would have to satisfy the revised QM
requirements of Sec. 1026.43(e)(2), and so would be prevented from
including risky features and would be priced only moderately above
prime loans. Accordingly, the Bureau preliminarily concludes that a
rebuttable presumption of compliance is warranted for such loans. This
approach may strike an appropriate balance between the access to credit
benefits that arise from providing a greater degree of certainty that
such loans comply with the ATR requirements and the consumer
protections that stem from permitting consumers the opportunity to
rebut the presumption of compliance.
The Bureau is not proposing to revise Sec. 1026.43(e)(1)(ii)(B),
which defines the grounds on which the presumption of compliance that
applies to higher-priced QMs can be rebutted. Section
1026.43(e)(1)(ii)(B) provides that a consumer may rebut the presumption
by showing that, at the time the loan was originated, the consumer's
income and debt obligations left insufficient residual income or assets
to meet living expenses. The analysis considers the consumer's monthly
payments on the loan, mortgage-related obligations, and any
simultaneous loans of which the creditor was aware, as well as any
recurring, material living expenses of which the creditor was aware.
The Bureau stated in the January 2013 Final Rule that this standard
was sufficiently broad to provide consumers a reasonable opportunity to
demonstrate that the creditor did not have a good faith and reasonable
belief in the consumer's repayment ability, despite meeting the
prerequisites of a QM. At the same time, the Bureau stated that it
believed the standard was sufficiently clear to provide certainty to
creditors, investors, and regulators about the standards by which the
presumption can successfully be challenged in cases where creditors
have correctly followed the QM requirements. The Bureau also noted that
the standard was consistent with the standard in the 2008 HOEPA Final
Rule.\235\ Commentary to that rule provides, as an example of how its
presumption may be rebutted, that the consumer could show ``a very high
debt-to-income ratio and a very limited residual income . . . depending
on all of the facts and circumstances.'' \236\ The Bureau noted that,
under the definition of QM that the Bureau was adopting, the creditor
was generally not entitled to a presumption if the consumer's DTI ratio
was ``very high.'' The Bureau stated that, as a result, the Bureau was
focusing the standard for rebutting the presumption in the January 2013
Final Rule on whether, despite meeting a DTI test, the consumer
nonetheless had insufficient residual income to cover the consumer's
living expenses.\237\
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\235\ Id. at 6512.
\236\ See Regulation Z comment 34(a)(4)(iii)-1.
\237\ 78 FR 6408, 6511-12 (Jan. 30, 2013). The Bureau in the
January 2013 Final Rule stated that it interpreted TILA section
129C(b)(1) to create a rebuttable presumption of compliance, but
exercised its adjustment authority under TILA section 105(a) to
limit the ability to rebut the presumption because the Bureau found
that an open-ended rebuttable presumption would unduly restrict
access to credit without a corresponding benefit to consumers. Id.
at 6514.
---------------------------------------------------------------------------
The Bureau is not proposing to change the standard for rebutting
the presumption of compliance because it believes the existing standard
continues to balance the consumer protection and access to credit
considerations described above appropriately. For example, the Bureau
is not amending the presumption of compliance to provide that the
consumer may use the DTI ratio to rebut the presumption of compliance
by establishing that the DTI ratio is very high, or by establishing
that the DTI ratio is very high and that the residual income is not
sufficient. First, the Bureau tentatively determines that permitting
the consumer to rebut the presumption by establishing that the DTI
ratio is very high is not necessary because the existing rebuttal
standard already incorporates an examination of the consumer's actual
income and debt obligations (i.e., the components of the DTI ratio) by
providing the consumer the option to show that the consumer's residual
income--which is calculated using the same components--was insufficient
at consummation. Accordingly, the Bureau anticipates that the addition
of DTI ratio to the rebuttal standard would not add probative value
beyond the current residual income test in Sec. 1026.43(e)(1)(ii)(B).
Second, the Bureau anticipates that the addition of DTI ratio as a
ground to rebut the presumption of compliance would undermine
compliance certainty to creditors and the secondary market without
providing any clear benefit to consumers. The Bureau tentatively
determines that the rebuttable presumption standard would continue to
be sufficiently broad to provide consumers a reasonable opportunity to
demonstrate that the creditor did not have a good faith and reasonable
belief in the consumer's repayment ability, despite meeting the
prerequisites of a QM. The Bureau requests comment on its tentative
determination not to amend the grounds on which the presumption of
compliance can be rebutted. The Bureau also requests comment on whether
to amend the grounds on which the presumption of compliance can be
rebutted, such as where the consumer has a very high DTI and low
residual income. To the extent commenters suggest that the Bureau
should amend the grounds on which to rebut the presumption to add
instances of a consumer having very high DTI, the Bureau requests
comment on whether and how to define ``very high DTI.''
The Bureau requests comment on all aspects of the proposed approach
for the presumption of compliance. In particular, the Bureau requests
comment, including data or other analysis, on whether a safe harbor for
QMs that are not higher priced is appropriate and, if so, on whether
other requirements should be imposed for such QMs to receive a safe
harbor.
E. Alternative to the Proposed Price-Based QM Definition: Retaining a
DTI Limit
Although the Bureau is proposing to remove the 43 percent DTI limit
and adopt a price-based approach for the General QM loan definition,
the Bureau requests comment on an alternative approach that retains a
DTI limit, but raises it above the current limit of 43 percent and
provides a more flexible set of standards for verifying debt and income
in place of appendix Q.
As discussed above, the Bureau is proposing to remove the 43
percent DTI limit because it is concerned that, after the expiration of
the Temporary GSE QM loan definition, the 43 percent DTI limit would
result in a significant reduction in the size of QM and potentially
could result in a significant reduction in access to credit. The
[[Page 41742]]
Bureau proposes to move away from a DTI-based approach because it is
concerned that imposing a DTI limit as a condition for QM status under
the General QM loan definition may be overly burdensome and complex in
practice and may unduly restrict access to credit because it provides
an incomplete picture of the consumer's financial capacity. The Bureau
is proposing to remove appendix Q because its definitions of debt and
income are rigid and difficult to apply and do not provide the level of
compliance certainty that the Bureau anticipated at the time of the
January 2013 Final Rule. As noted above, the Bureau is proposing a
price-based General QM loan definition because it preliminarily
concludes that a loan's price, as measured by comparing a loan's APR to
APOR for a comparable transaction, is a strong indicator of a
consumer's ability to repay and is a more holistic and flexible measure
of a consumer's ability to repay than DTI alone.
At the same time, the Bureau acknowledges concerns about a price-
based approach, as described in part V, above. In particular, the
Bureau acknowledges the sensitivity of a price-based QM definition to
macroeconomic cycles, including concerns that the price-based approach
could be pro-cyclical, with a more expansive QM market when the economy
is expanding, and a more restrictive QM market when credit is tight.
The Bureau is especially concerned about these potential effects given
the recent economic disruptions associated with the COVID-19 pandemic.
If the QM market were to contract, the Bureau would be concerned about
a reduction in access to credit because of the modest amount of non-QM
lending identified in the Bureau's Assessment Report, which the Bureau
understands has declined further in recent months. The Bureau also
acknowledges that a small share of loans that satisfy the current
General QM loan definition would lose QM status under the proposed
price-based approach due to the loan's rate spread exceeding the
applicable threshold.
For these reasons, the Bureau requests comment on whether an
approach that increases the DTI limit to a specific threshold within a
range of 45 to 48 percent and that includes more flexible definitions
of debt and income would be a superior alternative to a price-based
approach.\238\ As discussed above, the January 2013 Final Rule
incorporated DTI as part of the General QM loan definition because the
Bureau believed the QM criteria should include a standard for
evaluating the consumer's ability to repay, in addition to the product-
feature restrictions and other requirements that are specified in TILA.
The Bureau has acknowledged that DTI is predictive of loan performance,
and some commenters responding to the ANPR advocated for retaining a
DTI limit as part of the General QM loan definition, arguing that it is
a strong indicator of a consumer's ability to repay. The Bureau adopted
a specific DTI limit as part of the General QM loan definition to
provide certainty to creditors that a loan is in fact a QM.\239\ The
Bureau also provided a specific DTI limit to give certainty to
assignees and investors in the secondary market, because the Bureau
believed such certainty would help reduce possible concerns regarding
risk of liability and promote credit availability.\240\ Numerous
commenters on the 2011 Proposed Rule and comments submitted subsequent
to publication of the January 2013 Final Rule have highlighted the
value of providing objective requirements that creditors can identify
and apply based on information contained in loan files. Unlike a price-
based approach, a DTI-based approach would be counter-cyclical, because
of the positive correlation between interest rates and DTI ratios.
Consumers' monthly payments on their debts--the numerator in DTI--will
be higher when interest rates and home prices are high, leading to a
more restrictive QM market. By contrast, DTI ratios will be lower when
interest rates and home prices are lower, leading to a more expansive
QM market.
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\238\ The Bureau acknowledges that some loans currently
originated as Temporary GSE QM loans have higher DTI ratios.
However, the Bureau is concerned about adopting a DTI limit above a
range of 45 to 48 percent without a requirement to consider
compensating factors. The Bureau is concerned about the complexity
of approaches to the General QM loan definition that incorporate
compensating factors, as explained in part V.C, above.
\239\ 78 FR 6408 at 6526-27.
\240\ Id.
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The Bureau is proposing to remove the 43 percent DTI limit and
appendix Q, based in substantial part on concerns about access to
credit and the challenges associated with using appendix Q to define
income and debt, and to adopt a price-based approach for the General QM
loan definition. However, the Bureau requests comment on whether an
alternative approach that adopts a higher DTI limit and a more flexible
standard for defining debt and income could mitigate these concerns and
provide a superior alternative to the price-based approach. In
particular, the Bureau requests comment on whether such an approach
would adequately balance considerations related to ensuring consumers'
ability to repay and maintaining access to credit.
As described above, the Bureau uses early delinquency (measured by
whether a consumer was ever 60 or more days past due within the first 2
years after origination) as a proxy for the likelihood of a lack of
consumer ability to repay at consummation across a wide pool of loans.
The Bureau's analyzed the relationship between DTI ratios and early
delinquency, using data on first-lien conventional purchase
originations from the NMDB, including a matched sample of NMDB and HMDA
loans. That analysis, as shown in Tables 3 and 4 above, shows that
early delinquency rates increase consistently with DTI ratio. This
relationship is like the pattern shown in the Bureau's analysis of
early delinquency rates by rate spread. For 2002-2008 originations, as
shown in Table 3, there was a 7 percent early delinquency rate for
loans with DTI ratios between 44 and 48 percent. For the sample of 2018
originations in the NMDB matched to HMDA data, as shown in Table 4,
there was a 0.9 percent early delinquency rate for loans with DTI
ratios between 44 and 50 percent.
Tables 5 and 6 show the early delinquency rates of these same
samples categorized according to both their DTI and their rate spreads.
Table 5, which shows early delinquency rates for the 2002-2008 data,
shows early delinquency rates as high as 19 percent for loans with DTI
ratios between 46 and 48 percent that are priced between 2 and 2.24
percentage points over APOR. This approximates the loans with the
highest DTI and pricing that would be QMs under this alternative. For
comparison, as discussed in the section-by-section analysis of Sec.
1026.43(e)(2)(vi), the highest early delinquency rates for loans within
the current General QM loan definition is 16 percent (DTI ratios of 41
to 43 percent and priced 2 percentage points or more over APOR) and the
highest early delinquency rates for loans within the General QM loan
definition under the proposed price-based approach is 22 percent (DTI
ratios of 61 to 70 percent priced between 1.75 and 1.99 percentage
points over APOR).
Table 6, which shows early delinquency rates for the 2018 sample,
allows a similar comparison for 2018 originations. Table 6 shows early
delinquency rates of 4.2 percent for loans with DTI ratios between 44
and 50 percent that are priced 2 percentage points or more above APOR.
However,
[[Page 41743]]
the highest early delinquency rates for loans within the current
General QM loan definition or the alternative is 4.4 percent (DTI
ratios of 26 to 35 percent and priced 2 percentage points or more over
APOR). The highest early delinquency rates for loans within the General
QM loan definition under the proposed price-based approach is 3.2
percent (DTI ratios of 26 to 35 percent priced between 1.5 and 1.99
percentage points over APOR).
The Bureau has also analyzed the potential effects of a DTI-based
approach on the size of QM and potentially on access to credit. As
indicated in Table 8 below, 2018 HMDA data show that with the Temporary
GSE QM loan definition and the General QM loan definition with a 43
percent DTI limit, 90.6 percent of conventional purchase loans were
safe harbor QM loans and 95.8 percent were safe harbor QM or rebuttable
presumption QM loans. If, instead, the Temporary GSE QM loan definition
were not in place along with the General QM loan definition (with the
43 percent DTI limit), and assuming no change in consumer or creditor
behavior from the 2018 HMDA data, then only 69.3 percent of loans would
have been safe harbor QM loans and 73.6 percent of loans would have
been safe harbor QM loans or rebuttable presumption QM loans. Raising
the DTI limit above 43 percent would increase the size of the QM market
and, as a result, potentially increase access to credit relative to the
General QM loan definition with a DTI limit of 43 percent. The
magnitude of the increase in the size of the QM market and potential
increase in access to credit depends on the selected DTI limit. A DTI
limit in the range of 45 to 48 percent would likely result in a QM
market that is larger than one with a DTI limit of 43 percent but
smaller than the status quo (i.e., Temporary GSE QM loan definition and
DTI limit of 43 percent). However, the Bureau expects that consumers
and creditors would respond to changes in the General QM loan
definition, potentially allowing additional loans to be made as safe
harbor QM loans or rebuttable presumption QM loans.
Table 8--Share of 2018 Conventional Purchase Loans Within Various Safe
Harbor QM and Rebuttable Presumption QM Definitions
[HMDA data]
------------------------------------------------------------------------
Safe harbor QM QM overall
(share of (share of
Approach conventional conventional
market) market)
------------------------------------------------------------------------
Temporary GSE QM + DTI 43......... 90.6 95.8
Proposal (Pricing at 2.0)......... 91.6 96.1
DTI limit 43...................... 69.3 73.6
DTI limit 45...................... 76.1 80.9
DTI limit 46...................... 78.8 83.8
DTI limit 47...................... 81.4 86.6
DTI limit 48...................... 84.1 89.4
DTI limit 49...................... 87.0 92.4
DTI limit 50...................... 90.8 96.4
------------------------------------------------------------------------
The Bureau seeks comment on whether to retain a specific DTI limit
for the General QM loan definition, rather than or in addition to the
proposed price-based approach. The Bureau specifically seeks comment on
a specific DTI limit between 45 and 48 percent. The Bureau seeks
comment and data on whether increasing the DTI limit to a specific
percentage between 45 and 48 percent would be a superior alternative to
the proposed price-based approach, and, if so, on what specific DTI
percentage the Bureau should include in the General QM loan definition.
The Bureau seeks comment and data as to how specific DTI percentages
would be expected to affect access to credit and would be expected to
affect the risk that the General QM loan definition would include loans
for which the Bureau should not presume that the consumers who receive
them have the ability to repay. The Bureau also requests comment on
whether increasing the DTI limit to a specific percentage between 45 to
48 percent would better balance the goals of ensuring access to
responsible, affordable credit and ensuring that QMs are limited to
loans for which the Bureau should presume that consumers have the
ability to repay. The Bureau also requests comment on the macroeconomic
effects of a DTI-based approach as well as whether and how the Bureau
should weigh such effects in amending the General QM loan definition.
In addition, the Bureau requests comment on whether, if the Bureau
adopts a higher specific DTI limit as part of the General QM loan
definition, the Bureau should retain the price-based threshold of 1.5
percentage points over APOR to separate safe harbor QM loans from
rebuttable presumption QM loans for first-lien transactions.
The Bureau also requests comment on whether to adopt a hybrid
approach in which a combination of a DTI limit and a price-based
threshold would be used in the General QM loan definition. One such
approach could impose a DTI limit only for loans above a certain
pricing threshold, to reduce the likelihood that the presumption of
compliance with the ATR requirement would be provided to loans for
which the consumer lacks ability to repay, while avoiding the potential
burden and complexity of a DTI limit for many lower-priced loans. The
Bureau estimates that 81 percent of conventional purchase loans have
rate spreads below 1 percentage point and no product features
restricted under the General QM loan definition. For example, the rule
could impose a DTI limit of 50 percent for loans with rate spreads at
or above 1 percentage point. Using 2018 HMDA data, the Bureau estimates
that 91.5 percent of conventional purchase loans would be safe harbor
QM loans under this approach, and 96 percent would be QM loans. A
similar approach might impose a DTI limit above a certain pricing
threshold and also tailor the presumption of compliance with the ATR
requirement based on DTI. For example, the rule could provide that (1)
for loans with rate spreads under 1 percentage point, the loan is a
safe harbor QM regardless of the consumer's DTI ratio; (2) for loans
with rate spreads at or above 1 but less than 1.5 percentage points, a
loan is a safe harbor QM if the consumer's DTI ratio does not
[[Page 41744]]
exceed 50 percent and a rebuttable presumption QM if the consumer's DTI
is above 50 percent; and (3) if the rate spread is at or above 1.5 but
less than 2 percentage points, loans would be rebuttable presumption QM
if the consumer's DTI ratio does not exceed 50 percent and non-QM if
the DTI ratio is above 50 percent. Using 2018 HMDA data, the Bureau
estimates that 91.5 percent of conventional purchase loans would be
safe harbor QM loans under this approach, and 96.1 percent would be QM
loans. The Bureau requests comment on whether a DTI limit of up to 50
percent would be appropriate under these hybrid approaches that
incorporate pricing into the General QM loan definition given that the
pricing threshold would generally limit the additional risk factors
beyond the higher DTI ratio.
Another hybrid approach would impose a DTI limit on all General QM
loans but would allow higher DTI ratios for loans below a set pricing
threshold. For example, the rule could generally impose a DTI limit of
47 percent but could permit a loan with a DTI ratio up to 50 percent to
be eligible for QM status under the General QM loan definition if the
APR is less than 2 percentage points over APOR. This approach might
limit the likelihood of providing QM status to loans for which the
consumer lacks ability to repay, but also would permit some lower-
priced loans with higher DTI ratios to achieve QM status. Using 2018
HDMA data, the Bureau estimates that 90.8 percent of conventional
purchase loans would be safe harbor QM loans under this approach, and
96.2 percent would be QM loans. The Bureau requests comment on whether
these hybrid approaches or a different hybrid approach would better
address concerns about access to credit and ensuring that the General
QM criteria support a presumption that consumers have the ability to
repay their loans.
With respect to the Bureau's concerns about appendix Q, the Bureau
requests comment on an alternative method of defining debt and income
the Bureau believes could replace appendix Q in conjunction with a
specific DTI limit. As noted, the Bureau is concerned that the appendix
Q definitions of debt and income are rigid and difficult to apply and
do not provide the level of compliance certainty that the Bureau
anticipated at the time of the January 2013 Final Rule. Further, under
the current rule, some loans that would otherwise have DTI ratios below
43 percent do not satisfy the General QM loan definition because their
method of documenting and verifying income or debt is incompatible with
appendix Q. In particular, the Bureau requests comment on whether the
approach in proposed Sec. 1026.43(e)(2)(v) could be applied with a
General QM loan definition that includes a specific DTI limit. As
discussed in more detail in the section-by-section discussion of Sec.
1026.43(e)(2)(v), proposed Sec. 1026.43(e)(2)(v)(A) would require
creditors to consider income or assets, debt obligations, alimony,
child support, and DTI or residual income for their ability-to-repay
determination. Proposed Sec. 1026.43(e)(2)(v)(B) and the associated
commentary explain how creditors must verify and count the consumer's
current or reasonably expected income or assets other than the value of
the dwelling (including any real property attached to the dwelling)
that secures the loan and the consumer's current debt obligations,
alimony, and child support, relying on the standards set forth in the
ATR requirements in Sec. 1026.43(c). Proposed Sec.
1026.43(e)(2)(v)(B) would further provide creditors a safe harbor with
standards the Bureau may specify for verifying debt and income. This
could potentially include relevant provisions from the Fannie Mae
Single Family Selling Guide, the Freddie Mac Single-Family Seller/
Servicer Guide, FHA's Single Family Housing Policy Handbook, the VA's
Lenders Handbook, and USDA's Field Office Handbook for the Direct
Single Family Housing Program and Handbook for the Single Family
Guaranteed Loan Program, current as of this proposal's public release.
The Bureau also is seeking comments on potentially adding to the safe
harbor other standards that external stakeholders develop.
The Bureau requests comment on whether the alternative method of
defining debt and income in proposed Sec. 1026.43(e)(2)(v)(B) could
replace appendix Q in conjunction with a specific DTI limit. As noted
above, the Bureau is concerned that this approach that combines a
general standard with safe harbors may not be appropriate for a
specific DTI limit. The Bureau requests comment on whether the approach
in proposed Sec. 1026.43(e)(2)(v)(B) would address the problems
associated with appendix Q and would provide an alternative method of
defining debt and income that would be workable with a specific DTI
limit. The Bureau seeks comment on whether allowing creditors to use
standards the Bureau may specify to verify debt and income--as would be
permitted under proposed Sec. 1026.43(e)(2)(v)(B)--as well as
potentially other standards external stakeholders develop and the
Bureau adopts would provide adequate clarity and flexibility while also
ensuring that DTI calculations across creditors and consumers are
sufficiently consistent to provide meaningful comparison of a
consumer's calculated DTI to any DTI ratio threshold specified in the
rule.
The Bureau also requests comment on what changes, if any, would be
needed to proposed Sec. 1026.43(e)(2)(v)(B) to accommodate a specific
DTI limit. For example, the Bureau requests comment on whether
creditors that comply with guidelines that have been revised but are
substantially similar to the guides specified above should receive a
safe harbor, as the Bureau has proposed. The Bureau also seeks comment
on its proposal to allow creditors to ``mix and match'' verification
standards, including whether the Bureau should instead limit or
prohibit such ``mixing and matching'' under an approach that
incorporates a specific DTI limit. The Bureau requests comment on
whether these aspects of the approach in proposed Sec.
1026.43(e)(2)(v)(B), if used in conjunction with a specific DTI limit,
would provide sufficient certainty to creditors, investors, and
assignees regarding a loan's QM status and whether it would result in
potentially inconsistent application of the rule.
VI. Section-by-Section Analysis
1026.43 Minimum Standards for Transactions Secured by a Dwelling
43(b) Definitions
43(b)(4)
Section 1026.43(b)(4) provides the definition of a higher-priced
covered transaction. It provides that a covered transaction is a
higher-priced covered transaction if the APR exceeds APOR for a
comparable transaction as of the date the interest rate is set by the
applicable rate spread specified in the Rule. For purposes of General
QM loans under Sec. 1026.43(e)(2), the applicable rate spreads are 1.5
or more percentage points for a first-lien covered transaction and 3.5
or more percentage points for a subordinate-lien covered transaction.
Pursuant to Sec. 1026.43(e)(1), a loan that satisfies the requirements
of a qualified mortgage and is a higher-priced covered transaction
under Sec. 1026.43(b)(4) is eligible for a rebuttable presumption of
compliance with the ATR requirements. A qualified mortgage that is not
a higher-priced covered transaction is eligible for a conclusive
presumption of compliance with the ATR requirements.
The Bureau is proposing to revise Sec. 1026.43(b)(4) to create a
special rule
[[Page 41745]]
for purposes of determining whether certain types of General QM loans
under Sec. 1026.43(e)(2) are higher-priced covered transactions. This
special rule would apply to loans for which the interest rate may or
will change within the first five years after the date on which the
first regular periodic payment will be due. For such loans, the
creditor would be required to determine the APR, for purposes of
determining whether a QM under Sec. 1026.43(e)(2) is a higher-priced
covered transaction, by treating the maximum interest rate that may
apply during that five-year period as the interest rate for the full
term of the loan.
An identical special rule also would apply to loans for which the
interest rate may or will change under proposed Sec.
1026.43(e)(2)(vi), which would revise the definition of a General QM
loan under Sec. 1026.43(e)(2) to implement the price-based approach
described in part V. The section-by-section analysis of proposed Sec.
1026.43(e)(2)(vi) explains the Bureau's reasoning for proposing these
rules. The special rules in the proposed revisions to Sec.
1026.43(b)(4) and in proposed Sec. 1026.43(e)(2)(vi) would not modify
other provisions in Regulation Z for determining the APR for other
purposes, such as the disclosures addressed in or subject to the
commentary to Sec. 1026.17(c)(1).
Proposed comment 43(b)(4)-4 explains that provisions in subpart C,
including commentary to Sec. 1026.17(c)(1), address how to determine
the APR disclosures for closed-end credit transactions and that
provisions in Sec. 1026.32(a)(3) address how to determine the APR to
determine coverage under Sec. 1026.32(a)(1)(i). It further explains
that proposed Sec. 1026.43(b)(4) requires, only for purposes of a QM
under paragraph (e)(2), a different determination of the APR for
purposes of paragraph (b)(4) for a loan for which the interest rate may
or will change within the first five years after the date on which the
first regular periodic payment will be due. It also cross-references
proposed comment 43(e)(2)(vi)-4 for how to determine the APR of such a
loan for purposes of Sec. 1026.43(b)(4) and (e)(2)(vi).
As discussed above in part IV, TILA section 105(a), directs the
Bureau to prescribe regulations to carry out the purposes of TILA, and
provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith. In particular, it is
the purpose of TILA section 129C, as amended by the Dodd-Frank Act, to
assure that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the loans
and that are understandable.
As also discussed above in part IV, TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of section 129C, necessary and appropriate
to effectuate the purposes of section 129C and section 129B, to prevent
circumvention or evasion thereof, or to facilitate compliance with such
section.
The Bureau is proposing the special rule in Sec. 1026.43(b)(4)
regarding the APR determination of certain loans for which the interest
rate may or will change pursuant to its authority under TILA section
105(a) to make such adjustments and exceptions as are necessary and
proper to effectuate the purposes of TILA, including that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay the loans. The Bureau believes that
these proposed provisions may ensure that safe harbor QM status would
not be accorded to certain loans for which the interest rate may or
will change that pose a heightened risk of becoming unaffordable
relatively soon after consummation. The Bureau is also proposing these
provisions pursuant to its authority under TILA section
129C(b)(3)(B)(i) to revise and add to the statutory language. The
Bureau believes that the proposed APR determination provisions in Sec.
1026.43(b)(4) may ensure that responsible, affordable mortgage credit
remains available to consumers in a manner consistent with the purpose
of TILA section 129C, referenced above, as well as effectuate that
purpose.
The Bureau requests comment on all aspects of the proposed special
rule that would be required in proposed Sec. 1026.43(b)(4) to
determine the APR for certain loans for which the interest rate may or
will change. See the section-by-section analysis of proposed Sec.
1026.43(e)(2)(vi) for specific data requests and additional
solicitation of comments.
43(c) Repayment Ability
43(c)(4) Verification of Income or Assets
TILA section 129C(a)(4) states that a creditor making a residential
mortgage loan shall verify amounts of income or assets that such
creditor relies on to determine repayment ability, including expected
income or assets, by reviewing the consumer's Internal Revenue Service
(IRS) Form W-2, tax returns, payroll receipts, financial institution
records, or other third-party documents that provide reasonably
reliable evidence of the consumer's income or assets. In the January
2013 Final Rule, the Bureau implemented this requirement in Sec.
1026.43(c)(4), which states that a creditor must verify the amounts of
income or assets that the creditor relies on under Sec.
1026.43(c)(2)(i) to determine a consumer's ability to repay a covered
transaction using third-party records that provide reasonably reliable
evidence of the consumer's income or assets. Section 1026.43(c)(4)
further states that a creditor may verify the consumer's income using a
tax-return transcript issued by the IRS and lists several examples of
other records the creditor may use to verify the consumer's income or
assets, including, among others, financial institution records.
Additionally, Sec. 1026.43(e)(2)(v)(A) provides that a General QM loan
is a covered transaction for which the creditor considers and verifies
at or before consummation the consumer's current or reasonably expected
income or assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan in
accordance with Sec. 1026.43(c)(4), as well as Sec. 1026.43(c)(2)(i)
and appendix Q.
The Bureau is not proposing to change the text of Sec.
1026.43(c)(4). The Bureau is proposing to add comment 43(c)(4)-4, which
would clarify that a creditor does not meet the requirements of Sec.
1026.43(c)(4) if it observes an inflow of funds into the consumer's
account without confirming that the funds are income. The proposed
comment would also state that, for example, a creditor would not meet
the requirements of Sec. 1026.43(c)(4) where it observes an
unidentified $5,000 deposit in the consumer's account but fails to take
any measures to confirm or lacks any basis to conclude that the deposit
represents the consumer's personal income and not, for example,
proceeds from the disbursement of a loan. (As described below in the
section-by-section analysis of proposed Sec. 1026.43(e)(2)(v), below,
the Bureau is also proposing to amend
[[Page 41746]]
the verification requirements in the General QM loan definition.)
The Bureau is proposing to include this clarification as part of
its effort to avoid potential compliance uncertainty that could arise
from the removal of appendix Q and from the resulting greater reliance
on regulation text and commentary to define a creditor's obligations to
consider and verify a consumer's income, assets, debt obligations,
alimony, and child support. (Other proposed revisions related to this
effort are described below with respect to Sec. 1026.43(e)(2)(v).) The
Bureau understands, based on outreach and on its experience supervising
creditors, that this clarification could be useful to creditors because
the Rule includes ``financial institution records'' as one of the
examples of records that a creditor may use to verify a consumer's
income or assets. As part of their underwriting process, creditors may
seek to use transactions in electronic or paper financial records such
as consumer account statements to examine inflows and outflows from
consumers' accounts. In many cases, there may be sufficient basis in
transaction data alone, or in combination with other information, to
determine that a deposit or other credit to a consumer's account
represents income, such that a creditor's use of the data in an
underwriting process is distinguishable from the example in the
proposed comment. The Bureau's preliminary view is that this
clarification would help creditors understand their verification
requirements under the General QM loan definition, given that proposed
comment 43(e)(2)(v)(B)-1 would explain that a creditor must verify the
consumer's current or reasonably expected income or assets in
accordance with Sec. 1026.43(c)(4) and its commentary.\241\
---------------------------------------------------------------------------
\241\ See the section-by-section analysis for proposed Sec.
1026.43(e)(2)(v)(B).
---------------------------------------------------------------------------
The Bureau requests comment on this proposed new comment. The
Bureau also requests comment on whether additional clarifications may
be helpful with respect to cash flow underwriting and verifying whether
inflows are income under the Rule.
43(e) Qualified Mortgages
43(e)(2) Qualified Mortgage Defined--General
43(e)(2)(v)
As discussed above in part V, the Bureau is proposing to remove the
specific DTI limit in Sec. 1026.43(e)(2)(vi). Furthermore, as
discussed below in this section-by-section analysis of proposed Sec.
1026.43(e)(2)(v), the Bureau is proposing to require that creditors
consider the consumer's DTI ratio or residual income and to remove the
appendix Q requirements from Sec. 1026.43(e)(2)(v). The Bureau
tentatively concludes that these proposed amendments necessitate
additional revisions to clarify a creditor's obligation to consider and
verify certain information under the General QM loan definition.
Consequently, the Bureau is proposing to amend the consider and verify
requirements in Sec. 1026.43(e)(2)(v) and its associated commentary.
TILA section 129C contains several requirements that creditors
consider and verify various types of information. In the statute's
general ATR provisions, TILA section 129C(a)(1) requires that a
creditor make a reasonable and good faith determination, based on
``verified and documented information,'' that a consumer has a
reasonable ability to repay the loan. TILA section 129C(a)(3) states
that a creditor's ATR determination shall include ``consideration'' of
the consumer's credit history, current income, expected income the
consumer is reasonably assured of receiving, current obligations, DTI
ratio or the residual income the consumer will have after paying non-
mortgage debt and mortgage-related obligations, employment status, and
other financial resources other than the consumer's equity in the
dwelling or real property that secures repayment of the loan. TILA
section 129C(a)(4) states that a creditor making a residential mortgage
loan shall verify amounts of income or assets that such creditor relies
on to determine repayment ability, including expected income or assets,
by reviewing the consumer's IRS Form W-2, tax returns, payroll
receipts, financial institution records, or other third-party documents
that provide reasonably reliable evidence of the consumer's income or
assets. Finally, in the statutory QM definition, TILA section
129C(b)(2)(A)(iii) provides that, for a loan to be a QM, the income and
financial resources relied on to qualify the obligors on the loan must
be ``verified and documented.''
In the January 2013 Final Rule, the Bureau implemented the
requirements to consider and verify various factors for the general ATR
standard in Sec. 1026.43(c)(2), (c)(3), (c)(4), and (c)(7). Section
1026.43(c)(2) states that--except as provided in certain other
provisions (including the General QM loan definition)--a creditor must
consider several specified factors in making its ATR determination.
These factors include, among others, the consumer's current or
reasonably expected income or assets, other than the value of the
dwelling, including any real property attached to the dwelling, that
secures the loan (under Sec. 1026.43(c)(2)(i)); the consumer's current
debt obligations, alimony, and child support (Sec. 1026.43(c)(2)(vi));
and the consumer's monthly DTI ratio or residual income in accordance
with Sec. 1026.43(c)(7). Section 1026.43(c)(3) requires a creditor to
verify the information the creditor relies on in determining a
consumer's repayment ability using reasonably reliable third-party
records, with a few specified exceptions. Section 1026.43(c)(3) further
states that a creditor must verify a consumer's income and assets that
the creditor relies on in accordance with Sec. 1026.43(c)(4). Section
1026.43(c)(4) requires that a creditor verify the amounts of income or
assets that the creditor relies on to determine a consumer's ability to
repay a covered transaction using third-party records that provide
reasonably reliable evidence of the consumer's income or assets. It
also provides examples of records the creditor may use to verify the
consumer's income or assets.
As noted in part V, the January 2013 Final Rule incorporated some
aspects of the general ATR standards into the General QM loan
definition, including the requirement to consider and verify income or
assets and debt obligations, alimony, and child support. Section
1026.43(e)(2)(v) states that a General QM loan is a covered transaction
for which the creditor considers and verifies at or before
consummation: (A) The consumer's current or reasonably expected income
or assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan, in accordance
with appendix Q, Sec. 1026.43(c)(2)(i), and (c)(4); and (B) the
consumer's current debt obligations, alimony, and child support in
accordance with appendix Q, Sec. 1026.43(c)(2)(vi) and (c)(3). The
Bureau used its adjustment and exception authority under TILA section
129C(b)(3)(B)(i) to require creditors to consider and verify the
consumer's debt obligations, alimony, and child support pursuant to the
General QM loan definition.
The Bureau proposes to revise Sec. 1026.43(e)(2)(v) to separate
and clarify the requirements to consider and verify certain
information. Proposed Sec. 1026.43(e)(2)(v)(A) would contain the
``consider'' requirements, and proposed Sec. 1026.43(e)(2)(v)(B) would
contain the ``verify'' requirements. Specifically, proposed Sec.
1026.43(e)(2)(v) would state that a General QM loan is a covered
[[Page 41747]]
transaction for which the creditor: (A) Considers the consumer's income
or assets, debt obligations, alimony, child support, and monthly DTI
ratio or residual income, using the amounts determined from Sec.
1026.43(e)(2)(v)(B); and (B) verifies the consumer's current or
reasonably expected income or assets other than the value of the
dwelling (including any real property attached to the dwelling) that
secures the loan using third-party records that provide reasonably
reliable evidence of the consumer's income or assets, in accordance
with Sec. 1026.43(c)(4), and the consumer's current debt obligations,
alimony, and child support using reasonably reliable third-party
records in accordance with Sec. 1026.43(c)(3). The regulatory text
would also state that, for purposes of Sec. 1026.43(e)(2)(v)(A), the
consumer's monthly DTI ratio or residual income is determined in
accordance with Sec. 1026.43(c)(7), except that the consumer's monthly
payment on the covered transaction, including the monthly payment for
mortgage-related obligations, is calculated in accordance with Sec.
1026.43(e)(2)(iv).
As noted above, the Bureau is proposing to remove the specific 43
percent DTI limit in Sec. 1026.43(e)(2)(vi) and the appendix Q
requirement in Sec. 1026.43(e)(2)(v). Given that these proposed
amendments would change how a creditor would satisfy the General QM
loan definition, the Bureau is proposing to amend the consider and
verify requirements in Sec. 1026.43(e)(2)(v). Under the Bureau's
proposal, the General QM loan definition would no longer include a
specific DTI limit in Sec. 1026.43(e)(2)(vi), but a creditor would be
required to consider DTI or residual income, debt obligations, alimony,
child support, and income or assets under Sec. 1026.43(e)(2)(v). The
Bureau tentatively concludes that providing additional explanation of
the proposed requirement to consider this information may ease
compliance uncertainty. To meet the consider requirement in Sec.
1026.43(e)(2)(v)(A), the proposal would require the creditor to use the
amounts determined according to Sec. 1026.43(e)(2)(v)(B). For example,
if the creditor relied on assets in its ability-to-repay determination,
the creditor could consider current and reasonably expected assets
other than the value of the dwelling (including any real property
attached to the dwelling) that secures the loan as calculated under
1026.43(e)(2)(v)(B). The Bureau tentatively concludes that providing
additional explanation of the proposed requirement to consider income
or assets, debt obligations, alimony, child support, and DTI or
residual income may ease compliance uncertainty.
The Bureau is proposing to remove appendix Q and the requirement to
use appendix Q from the rule. The Bureau's principal reason for
adopting appendix Q in 2013 was to provide clear and specific standards
for calculating a consumer's debt, income, and DTI ratio for purposes
of comparison with the 43 percent DTI limit and to provide certainty
about whether a loan meets the requirements for being a General QM
loan. As discussed in more detail below, appendix Q has not provided
clear and specific standards, and the Bureau is proposing to remove the
43 percent DTI limit. Accordingly, the Bureau preliminarily concludes
that appendix Q, and the requirement to use appendix Q to calculate DTI
for purposes of the General QM loan definition, should be removed from
the Rule. However, appendix Q currently serves the additional function
of specifying what a creditor must do to comply with the requirements
of Sec. 1026.43(e)(2)(v) to consider and verify a consumer's income,
assets, debt obligations, alimony, and child support. The Bureau is
concerned that the rule would create significant compliance uncertainty
if it merely removed appendix Q without clarifying how a creditor can
evaluate various types of income, assets, and debt.
The Bureau's objective in proposing to clarify the Sec.
1026.43(e)(2)(v) requirements to consider a consumer's income, assets,
debt obligations, alimony, and child support is to ensure that a loan
for which a creditor disregards these factors cannot obtain QM status,
while ensuring that creditors and investors can readily determine if a
loan is a QM. The Bureau's primary objective in clarifying the
requirement to verify a consumer's income, assets, debt obligations,
alimony, and child support is to provide reasonable assurance that only
income and assets that exist or will exist are part of a creditor's ATR
determination and that none of the consumer's debt obligations,
alimony, and child support are excluded from consideration. The Bureau
also aims to ensure that the verification requirement provides
substantial flexibility for creditors to adopt innovative verification
methods, such as the use of bank account data that identifies the
source of deposits to determine personal income, while also specifying
examples of compliant verification standards to provide greater
certainty that a loan has QM status.
As described above, proposed Sec. 1026.43(e)(2)(v)(B) would
provide that creditors must verify income, assets, debt obligations,
alimony, and child support in accordance with the general ATR
verification provisions. Specifically, Sec. 1026.43(e)(2)(v)(B)(1)
requires a creditor to verify the consumer's current or reasonably
expected income or assets (including any real property attached to the
value of the dwelling) that secures the loan in accordance with Sec.
1026.43(c)(4), which states that a creditor must verify such amounts
using third-party records that provide reasonably reliable evidence of
the consumer's income or assets. Section 1026.43(e)(2)(v)(B)(2)
requires a creditor to verify the consumer's current debt obligations,
alimony, and child support in accordance with Sec. 1026.43(c)(3),
which states that a creditor must verify such amounts using reasonably
reliable third-party records. So long as a creditor complies with the
provisions of Sec. 1026.43(c)(3) with respect to debt obligations,
alimony, and child support and Sec. 1026.43(c)(4) with respect to
income and assets, the creditor is permitted to use any reasonable
verification methods and criteria. By incorporating Sec. 1026.43(c)(3)
and (c)(4) in Sec. 1026.43(e)(2)(v)(B), the Bureau seeks to maintain
in the General QM loan verification requirements the flexibility
inherent to these ATR provisions. At the same time, the Bureau seeks to
provide greater certainty to creditors regarding the General QM loan
verification requirements by explaining that a creditor complies with
Sec. 1026.43(e)(2)(v)(B) if it complies with any one of certain
verification standards the Bureau would specify.
The Bureau also proposes revisions to the commentary for Sec.
1026.43(e)(2)(v). The Bureau proposes to remove comments 43(e)(2)(v)-2
and -3. In general, these comments currently clarify that creditors
must consider and verify any income as well as any debt or liability
specified in appendix Q and that, while other income and debt may be
considered and verified, such income and debt would not be included in
the DTI ratio determination required by Sec. 1026.43(e)(2)(vi). The
Bureau preliminarily concludes that these comments would no longer be
needed in light of the proposed revisions to Sec. 1026.43(e)(2)(v).
The first sentence of each of these two comments merely restates
language in the regulatory text. The second sentence would no longer be
needed because the Bureau is proposing to remove references to appendix
Q in Sec. 1026.43(e)(2)(v). And the third sentence would no longer be
needed because the Bureau is proposing
[[Page 41748]]
to remove the DTI limit in Sec. 1026.43(e)(2)(vi).
43(e)(2)(v)(A)
As explained above, the Bureau proposes to revise Sec.
1026.43(e)(2)(v), which currently includes the requirement to consider
and verify the consumer's reasonably expected income or assets, debt
obligations, alimony, and child support, as part of the QM definition.
The Bureau is proposing to separate the consider and verify
requirements in Sec. 1026.43(e)(2)(v) into Sec. 1026.43(e)(2)(v)(A)
for the ``consider'' requirements and Sec. 1026.43(e)(2)(v)(B) for the
``verify'' requirements. The Bureau proposes to revise Sec.
1026.43(e)(2)(v)(A) to provide that a General QM loan is a covered
transaction for which the creditor, at or before consummation,
considers the consumer's income or assets, debt obligations, alimony,
child support, and monthly DTI ratio or residual income, using the
amounts determined from proposed Sec. 1026.43(e)(2)(v)(B).
For purposes of Sec. 1026.43(e)(2)(v)(A), the Bureau proposes to
prescribe the same method for the creditor to calculate the consumer's
monthly payment that is currently prescribed in Sec.
1026.43(e)(2)(vi), in which the consumer's monthly DTI ratio is
determined using the consumer's monthly payment on the covered
transaction and any simultaneous loan that the creditor knows or has
reason to know will be made. The Bureau is proposing to eliminate
appendix Q and the DTI limit in Sec. 1026.43(e)(2)(vi). To make clear
that any DTI calculation must incorporate alimony and child support--
which is currently facilitated through appendix Q--the Bureau is
proposing to cross-reference the Sec. 1026.43(c)(7) requirements. In
order to maintain the monthly DTI ratio calculation method from Sec.
1026.43(e)(2)(vi)(B), the Bureau is proposing to move the text
prescribing the calculation method from Sec. 1026.43(e)(2)(vi)(B) to
Sec. 1026.43(e)(2)(v)(A). The Bureau is proposing to expand the Sec.
1026.43(c)(7) cross-reference and the monthly payment calculation
method to residual income given that the proposal allows creditors the
option of considering residual income in lieu of DTI. The Bureau
tentatively concludes that the reference to simultaneous loans is not
necessary because the cross-reference to Sec. 1026.43(c)(7) would
require creditors to consider simultaneous loans.
Proposed Sec. 1026.43(e)(2)(v)(A) would revise existing Sec.
1026.43(e)(2)(v) by requiring a creditor to consider DTI or residual
income in addition to income or assets, debt obligations, alimony, and
child support, as determined under proposed Sec. 1026.43(e)(2)(v)(B).
The Bureau tentatively concludes that the amounts considered under
Sec. 1026.43(e)(2)(v)(A) should be consistent with the amounts
verified according to Sec. 1026.43(e)(2)(v)(B). For example, if the
creditor relies on assets in its ability-to-repay determination and
seeks to comply with the consider requirement under Sec.
1026.43(e)(2)(v)(A), the creditor could consider current and reasonably
expected assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan as
calculated under 1026.43(e)(2)(v)(B).
The Bureau is proposing the revision to add DTI to ensure that,
although the Bureau is proposing to eliminate the DTI limit in Sec.
1026.43(e)(2)(vi), creditors still must consider DTI (or residual
income, as discussed below) as part of the General QM loan definition.
The Bureau continues to believe that DTI is an important factor in
assessing a consumer's ability to repay. Comments responding to the
2019 ANPR indicate that creditors generally use DTI as part of their
underwriting process. These comments indicate that requiring as part of
the General QM loan definition that creditors consider DTI when
determining a consumer's ability to repay--even if the QM definition no
longer includes a specific DTI limit--would be consistent with current
market practices. In a final rule issued in June 2013 (June 2013 Final
Rule), the Bureau created an exception from the DTI limit requirement
for small creditors that hold QMs on portfolio.\242\ The Bureau
determined that, even though the DTI limit was not appropriate for a
small creditor that holds loans on their portfolio, DTI (or residual
income) was still a fundamental part of the creditor's ATR
determination.\243\ The Bureau tentatively concludes that requiring
creditors to consider DTI as part of the QM definition is necessary and
appropriate to ensure that consumers are offered and receive
residential mortgage loans on terms that reasonably reflect their
ability to repay the loan.
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\242\ 78 FR 35430 (June 12, 2013).
\243\ Id. at 35487 (``The Bureau continues to believe that
consideration of debt-to-income ratio or residual income is
fundamental to any determination of ability to repay. A consumer is
able to repay a loan if he or she has sufficient funds to pay his or
her other obligations and expenses and still make the payments
required by the terms of the loan. Arithmetically comparing the
funds to which a consumer has recourse with the amount of those
funds the consumer has already committed to spend or is committing
to spend in the future is necessary to determine whether sufficient
funds exist.'').
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Proposed Sec. 1026.43(e)(2)(v)(A) would require creditors to
consider either a consumer's monthly residual income or DTI. The
January 2013 Final Rule adopted a bright-line DTI limit for the General
QM loan definition under Sec. 1026.43(e)(2)(vi), but the Bureau
concluded that it did not have enough information to establish a
bright-line residual income limit as an alternative to the DTI
limit.\244\ In comparison, TILA and the January 2013 Final Rule allow
creditors to consider either residual income or DTI as part of the
general ATR requirements in Sec. 1026.43(c)(2)(vii), and the June 2013
Final Rule allows small creditors originating QM loans pursuant to
Sec. 1026.43(e)(5) to consider DTI or residual income. Given the
Bureau's proposal to eliminate the bright-line DTI limit in Sec.
1026.43(e)(2)(vi), comments from stakeholders discussed in the January
2013 Final Rule regarding the value of residual income in determining
ability to repay,\245\ and the Bureau's determination in the June 2013
Final Rule that residual income can be a valuable measure of ability to
repay, the Bureau tentatively concludes that allowing creditors the
option to consider (but not requiring them to consider) residual income
in lieu of DTI would allow space for creditor flexibility and
innovation and is necessary and proper to preserve access to
responsible, affordable mortgage credit.
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\244\ 78 FR 6408, 6528 (Jan. 30, 2013) (``Unfortunately,
however, the Bureau lacks sufficient data, among other
considerations, to mandate a bright-line rule based on residual
income at this time.'').
\245\ Id. at 6527 (``Another consumer group commenter argued
that residual income should be incorporated into the definition of
QM. Several commenters suggested that the Bureau use the general
residual income standards of the VA as a model for a residual income
test, and one of these commenters recommended that the Bureau
coordinate with FHFA to evaluate the experiences of the GSEs in
using residual income in determining a consumer's ability to
repay.''); id. at 6528 (``Finally, the Bureau acknowledges arguments
that residual income may be a better measure of repayment ability in
the long run. A consumer with a relatively low household income may
not be able to afford a 43 percent debt-to-income ratio because the
remaining income, in absolute dollar terms, is too small to enable
the consumer to cover his or her living expenses. Conversely, a
consumer with a relatively high household income may be able to
afford a higher debt ratio and still live comfortably on what is
left over.'').
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The Bureau is proposing the requirement that the creditor consider
the consumer's debt obligations, alimony, child support, income or
assets, and monthly DTI or residual income under Sec. 1026.43(e)(2)(A)
pursuant to its adjustment and
[[Page 41749]]
exception authority under TILA section 129C(b)(3)(B)(i). The Bureau
preliminarily finds that this addition to the General QM loan criteria
is necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner that is consistent
with the purposes of TILA section 129C and necessary and appropriate to
effectuate the purposes of TILA section 129C, which includes assuring
that consumers are offered and receive residential mortgage loans on
terms that reasonably reflect their ability to repay the loan. The
Bureau also incorporates this requirement pursuant to its authority
under TILA section 105(a) to issue regulations that, among other
things, contain such additional requirements, other provisions, or that
provide for such adjustments for all or any class of transactions, that
in the Bureau's judgment are necessary or proper to effectuate the
purposes of TILA, which include the above purpose of section 129C. The
Bureau preliminarily finds that including consideration of DTI or
residual income in the General QM loan criteria is necessary and proper
to fulfill the purpose of assuring that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loan. The Bureau also believes that Sec.
1026.43(e)(2)(A) is authorized by TILA section 129C(b)(2)(A)(vi), which
permits, but does not require, the Bureau to adopt guidelines or
regulations relating to debt-to-income ratios or alternative measures
of ability to pay regular expenses after payment of total monthly debt.
The Bureau is proposing to revise Sec. 1026.43(e)(2)(v)(A) to
incorporate the monthly payment calculation method from current Sec.
1026.43(e)(2)(vi)(B). In order to preserve the incorporation of alimony
and child support in this calculation--which currently is facilitated
by appendix Q--the Bureau is proposing to cross-reference the
requirement in Sec. 1026.43(c)(7). The cross-reference also
incorporates simultaneous loans. Additionally, given the proposal to
allow creditors to consider residual income in lieu of monthly DTI, the
Bureau is proposing to apply this calculation requirement to residual
income. This proposed revision would ensure that the mortgage payment
and the payment on any simultaneous loans are included in a manner
consistent with Sec. 1026.43(e)(2)(iv) both when a creditor considers
DTI or residual income. The Bureau tentatively concludes that requiring
this pre-existing calculation method for DTI and residual income is
appropriate because it would assist creditors in complying with the
consider requirement and would assist in enforcement of the rule
because it would encourage consistency in DTI and residual income
calculations.
To clarify the proposed requirements in Sec. 1026.43(e)(2)(v)(A),
the Bureau proposes to add comments 43(e)(2)(v)(A)-1 to -3. The Bureau
proposes these new comments because they may be appropriate to ensure
that the rule's requirement to consider the consumer's debt
obligations, alimony, child support, income or assets, and DTI ratio or
residual income is clear and detailed enough to provide creditors with
sufficient certainty about whether a loan satisfies the General QM loan
definition. Under the proposal, the General QM loan definition would no
longer include a specific DTI limit in Sec. 1026.43(e)(2)(vi) and
would require instead that creditors consider DTI or residual income,
along with debt and income. By requiring calculation of DTI and
comparing that calculation to a DTI limit, the existing DTI limit
provides creditors with a bright-line rule demonstrating how to
consider the consumer's income or assets, debt, and DTI when making its
ATR determination. Without providing additional explanation of the
proposed requirement to consider DTI or residual income, along with
debt and income, eliminating the DTI limit could create compliance
uncertainty that could leave some creditors reluctant to originate QM
loans to consumers and could allow other creditors to originate risky
loans without considering DTI or residual income and still receive QM
status. In addition, without additional explanation, it may be
difficult to enforce the requirement to consider income or assets, debt
obligations, alimony, child support, and monthly DTI or residual
income. Several ANPR commenters requested that the Bureau maintain the
``consider'' requirement in the General QM loan definition and clarify
this requirement. Accordingly, the Bureau tentatively concludes that it
is appropriate to provide additional explanation for the consider
requirement in Sec. 1026.43(e)(2)(v) in proposed comments
43(e)(2)(v)(A)-1 to -3.
Proposed comment 43(e)(2)(v)(A)-1 would explain that, in order to
comply with the requirement in Sec. 1026.43(e)(2)(v)(A) to consider
income or assets, debt obligations, alimony, child support, and DTI
ratio or residual income, a creditor must take into account income or
assets, debt obligations, alimony, child support, and monthly DTI ratio
or residual income in its ATR determination. In making this
determination, creditors must use the amounts determined under the
requirement to verify the consumer's current or reasonably expected
income or assets and the consumer's current debt obligations, alimony,
and child support in Sec. 1026.43(e)(2)(v)(B). The proposed comment
would further explain that, according to requirements in Sec.
1026.25(a) to retain records showing compliance with the Rule, a
creditor must retain documentation showing how it took into account
these factors in its ATR determination. By citing the record retention
requirement, this comment would clarify that to comply with Sec.
1026.43(e)(2)(v)(A) and obtain QM status, a creditor must document how
the required factors were taken into account in the creditor's ATR
determination. If a creditor ignores the required factors of income or
assets, debt obligations, alimony, child support, and DTI or residual
income--or otherwise did not take them into account as part of its ATR
determination--the loan would not be eligible for QM status. While
creditors must take these factors into account and retain documentation
of how they did so, the Bureau emphasizes that creditors would have
great latitude in how they took these factors into account and that
they would be able to document how they did so in a simple and non-
burdensome manner, such as a creditor documenting that it followed its
standard procedures for considering these factors in connection with a
specific loan. As an example of the type of documents that a creditor
might use to show that income or assets, debt obligations, alimony,
child support, and DTI or residual income were taken into account, the
proposed comment cites an underwriter worksheet or a final automated
underwriting system certification, alone or in combination with the
creditor's applicable underwriting standards, that shows how these
required factors were taken into account in the creditor's ability-to-
repay determination.
To reinforce that the QM definition no longer would include a
specific DTI limit, proposed comment 43(e)(2)(v)(A)-2 explains that
creditors have flexibility in how they consider these factors and that
the proposed rule does not prescribe a specific monthly DTI or residual
income threshold. To assist creditors, the Bureau is proposing two
examples of how to comply with the requirement to consider DTI.
Proposed comment 43(e)(2)(v)(A)-2 provides an example in which a
creditor considers
[[Page 41750]]
monthly DTI or residual income by establishing monthly DTI or residual
income thresholds for its own underwriting standards and documenting
how those thresholds were applied to determine the consumer's ability
to repay. Given that some creditors use several thresholds that depend
on any relevant compensating factors, the Bureau is also proposing a
second example. The second example in the comment would provide that a
creditor may also consider DTI or residual income by establishing
monthly DTI or residual income thresholds and exceptions to those
thresholds based on other compensating factors, and documenting
application of the thresholds along with any applicable exceptions. The
Bureau tentatively concludes that both examples are consistent with
current market practices and therefore providing these examples would
clarify a loan's QM status without imposing a significant burden on the
market.
The Bureau is aware that some creditors look to factors in addition
to income or assets, debt obligations, alimony, child support, and DTI
or residual income in determining a consumer's ability to repay. For
example, the Bureau is aware that some creditors may look to net cash
flow into a consumer's deposit account as a method of residual income
analysis. As the Bureau understands it, a net cash flow calculation
typically consists of residual income, further reduced by consumer
expenditures other than those already subtracted from income in
calculating the consumer's residual income. Accordingly, the result of
a net cash flow calculation may be useful in to assessing the adequacy
of a particular consumer's residual income.
Proposed comment 43(e)(2)(v)(A)-3 would explain that the
requirement in Sec. 1026.43(e)(2)(v)(A) to consider income or assets,
debt obligations, alimony, child support, and monthly DTI or residual
income does not preclude the creditor from taking into account
additional factors that are relevant in making its ability-to-repay
determination. The proposed comment further provides that creditors may
look to comment 43(c)(7)-3 for guidance on considering additional
factors in determining the consumer's ATR. Comment 43(c)(7)-3 explains
that creditors may consider additional factors when determining a
consumer's ability to repay and provides an example of looking to
consumer assets other than the value of the dwelling, such as a savings
account.
The Bureau seeks comment on proposed Sec. 1026.43(e)(2)(v)(A) and
the related commentary. The Bureau specifically seeks comment on
whether the proposed commentary provides sufficient clarity as to what
creditors must do to comply with the requirement to consider income or
assets, debt obligations, alimony, child support, and DTI or residual
income, and whether it creates impediments to consideration of other
factors or data in making an ATR determination. The Bureau also seeks
comment on whether it should retain the monthly payment calculation
method for DTI, which it is proposing to move from Sec.
1026.43(e)(2)(vi)(B) to proposed Sec. 1026.43(e)(2)(v)(A).
The Bureau is proposing revisions to Sec. 1026.43(e)(2)(v)(A) and
related commentary as part of the proposal to eliminate the specific
DTI limit. In amending the General QM loan definition under Sec.
1026.43(e)(2), Bureau is concerned about balancing various factors,
including the need for clarity regarding QM status and for flexibility
as market underwriting practices evolve, while also trying to ensure
that creditors making loans that receive QM status have considered the
consumers' financial capacity and thus should receive a presumption of
compliance with the ATR requirements. In particular, the Bureau is
concerned about the potential that the price-based approach may permit
some loans to receive QM status, even if creditors may have originated
those loans without meaningfully considering the consumer's financial
capacity because they believe their risk of loss may be limited by
factors like a rising housing price environment or the consumer's
existing equity in the home. As discussed in the January 2013 Final
Rule, the Bureau is aware of concerns about creditors relying on
factors related to the value of the dwelling, like LTV ratio, and how
such reliance may have contributed to the mortgage crisis.\246\ Given
these concerns, the Bureau also seeks comment on whether proposed Sec.
1026.43(e)(2)(v)(A) and its associated commentary sufficiently address
the risk that loans with a DTI that is so high or residual income that
is so low that a consumer may lack ability to repay can obtain QM
status. In particular, the Bureau seeks comment on whether the Rule
should provide examples in which a creditor has not considered the
required factors and, if so, what may be appropriate examples. The
Bureau also requests comment on whether the Rule should provide that a
creditor does not appropriately consider DTI or residual income if a
very high DTI ratio or low residual income indicates that the consumer
lacks ability to repay but the creditor disregards this information and
instead relies on the consumer's expected or present equity in the
dwelling, such as might be identified through the consumer's LTV ratio.
The Bureau also requests comment on whether the Rule should specify
which compensating factors creditors may or may not rely on for
purposes of determining the consumer's ability to repay. The Bureau
also seeks comment on the tradeoffs of addressing these ability-to-
repay concerns with undermining the clarity of a loan's QM status. The
Bureau also seeks comment on the impact of the COVID-19 pandemic on how
creditors consider income or assets, debt obligations, alimony, child
support, and monthly DTI ratio or residual income.
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\246\ See id. at 6561 (Jan. 30, 2013) (``In some cases, lenders
and borrowers entered into loan contracts on the misplaced belief
that the home's value would provide sufficient protection. These
cases included subprime borrowers who were offered loans because the
lender believed that the house value either at the time of
origination or in the near future could cover any default. Some of
these borrowers were also counting on increased housing values and a
future opportunity to refinance; others likely understood less about
the transaction and were at an informational disadvantage relative
to the lender.''); id. at 6564 (``During those periods there were
likely some lenders, as evidenced by the existence of no-income, no-
asset (NINA) loans, that used underwriting systems that did not look
at or verify income, debts, or assets, but rather relied primarily
on credit score and LTV.''); id. at 6559 (``If the lender is assured
(or believes he is assured) of recovering the value of the loan by
gaining possession of the asset, the lender may not pay sufficient
attention to the ability of the borrower to repay the loan or to the
impact of default on third parties. For very low LTV mortgages,
i.e., those where the value of the property more than covers the
value of the loan, the lender may not care at all if the borrower
can afford the payments. Even for higher LTV mortgages, if prices
are rising sharply, borrowers with even limited equity in the home
may be able to gain financing since lenders can expect a profitable
sale or refinancing of the property as long as prices continue to
rise. . . . In all these cases, the common problem is the failure of
the originator or creditor to internalize particular costs, often
magnified by information failures and systematic biases that lead to
underestimation of the risks involved. The first such costs are
simply the pecuniary costs from a defaulted loan--if the loan
originator or the creditor does not bear the ultimate credit risk,
he or she will not invest sufficiently in verifying the consumer's
ability to repay.'').
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43(e)(2)(v)(B)
For the reasons discussed below, the Bureau proposes to revise
Sec. 1026.43(e)(2)(v)(B) to provide that a General QM loan is a
covered transaction for which the creditor, at or before consummation,
verifies the consumer's current or reasonably expected income or assets
other than the value of the dwelling (including any real property
attached to the dwelling) that secures the loan using third-party
[[Page 41751]]
records that provide reasonably reliable evidence of the consumer's
income or assets, in accordance with Sec. 1026.43(c)(4) and verifies
the consumer's current debt obligations, alimony, and child support
using reasonably reliable third-party records in accordance with Sec.
1026.43(c)(3).
To clarify this requirement, the Bureau proposes to add comments
43(e)(2)(v)(B)-1 through -3. Proposed comment 43(e)(2)(v)(B)-1 would
explain that Sec. 1026.43(e)(2)(v)(B) does not prescribe specific
methods of underwriting that creditors must use. It would provide that
Sec. 1026.43(e)(2)(v)(B)(1) requires a creditor to verify the
consumer's current or reasonably expected income or assets (including
any real property attached to the value of the dwelling) that secures
the loan in accordance with Sec. 1026.43(c)(4), which states that a
creditor must verify such amounts using third-party records that
provide reasonably reliable evidence of the consumer's income or
assets. The proposed comment would provide further that Sec.
1026.43(e)(2)(v)(B)(2) requires a creditor to verify the consumer's
current debt obligations, alimony, and child support in accordance with
Sec. 1026.43(c)(3), which states that a creditor must verify such
amounts using reasonably reliable third-party records. Proposed comment
43(e)(2)(v)(B)-1 would then clarify that, so long as a creditor
complies with the provisions of Sec. 1026.43(c)(3) with respect to
debt obligations, alimony, and child support and Sec. 1026.43(c)(4)
with respect to income and assets, the creditor is permitted to use any
reasonable verification methods and criteria.
Proposed comment 43(e)(2)(v)(B)-2 would clarify that ``current and
reasonably expected income or assets other than the value of the
dwelling (including any real property attached to the dwelling) that
secures the loan'' is determined in accordance with Sec.
1026.43(c)(2)(i) and its commentary and that ``current debt
obligations, alimony, and child support'' has the same meaning as under
Sec. 1026.43(c)(2)(vi) and its commentary. The proposed comment would
further clarify that Sec. 1026.43(c)(2)(i) and (vi) and the associated
commentary apply to a creditor's determination with respect to what
inflows and property it may classify and count as income or assets and
what obligations it must classify and count as debt obligations,
alimony, and child support, pursuant to its compliance with Sec.
1026.43(e)(2)(v)(B).
The Bureau notes that proposed comments 43(e)(2)(v)(B)-1 and -2
would enable creditors to take into account the effects of public
emergencies that affect consumers' incomes when verifying a particular
consumer's income. These proposed comments would clarify that Sec.
1026.43(e)(2)(v)(B) does not prescribe precisely how creditors must
verify the consumer's income or assets, debt obligations, alimony, and
child support--merely that they must do so using third-party records
that are reasonably reliable. As such, creditors would have the
flexibility to adjust their verification methods in the event of an
emergency, such as the COVID-19 pandemic, that affects consumer
incomes.
Proposed comment 43(e)(2)(v)(B)-3.i would explain further that a
creditor also complies with Sec. 1026.43(e)(2)(v)(B) if it satisfies
one of the specific verification standards the Bureau would set forth
in the rule. These standards may include relevant provisions in
specified versions of the Fannie Mae Single Family Selling Guide,\247\
the Freddie Mac Single-Family Seller/Servicer Guide,\248\ the FHA's
Single Family Housing Policy Handbook,\249\ the VA's Lenders
Handbook,\250\ and the USDA's Field Office Handbook for the Direct
Single Family Housing Program \251\ and the Handbook for the Single
Family Guaranteed Loan Program, current as of the date of this
proposal's public release.\252\ The Bureau seeks comment on whether
these or other verification standards should be incorporated into
proposed comment 43(e)(2)(v)(B)-3.i.
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\247\ Fed. Nat'l Mortgage Assoc., Single Family Selling Guide
(2020), https://selling-guide.fanniemae.com/.
\248\ Fed. Home Loan Mort. Corp., The Single-Family Seller/
Servicer Guide (2020), https://guide.freddiemac.com/app/guide/.
\249\ U.S. Dep't of Hous. & Urban Dev., Single Family Housing
Policy Handbook 4000.1 (2019), https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1.
\250\ U.S. Dept. of Veterans Affairs, Lenders Handbook-VA
Pamphlet 26-7 (2019), https://www.benefits.va.gov/WARMS/pam26_7.asp.
\251\ U.S. Dep't of Agric. Rural Hous. Serv., Direct Single
Family Housing Loans and Grants-Field Office Handbook HB-1-3550
(2019), https://www.rd.usda.gov/resources/directives/handbooks#hb13555.
\252\ U.S. Dep't of Agric. Rural Hous. Serv., Guaranteed Loan
Program Technical Handbook HB-1-3555 (2020), https://www.rd.usda.gov/resources/directives/handbooks#hb13555.
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Proposed comment 43(e)(2)(v)(B)-3.ii would clarify that a creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
requirements in the standards listed in comment 43(e)(2)(v)(B)-3 for
creditors to verify income or assets, debt obligations, alimony and
child support using specified guides or to include or exclude
particular inflows, property, and obligations as income, assets, debt
obligations, alimony, and child support. For example, such requirements
would include a specified standard's definition of the term ``self-
employment income,'' description of when the creditor may use self-
employment income as qualifying income for a mortgage, and explanation
of how the creditor must document self-employment income.
Proposed comment 43(e)(2)(v)(B)-3.iii would clarify that, for
purposes of compliance with Sec. 1026.43(e)(2)(v)(B), a creditor need
not comply with requirements in the standards listed in comment
43(e)(2)(v)(B)-3.i other than those that require creditors to verify
income, assets, debt obligations, alimony, and child support using
specified documents or to classify particular inflows, property, and
obligations as income, assets, debt obligations, alimony, and child
support. For example, a standard the Bureau would specify may include
information on the use of DTI ratios. Because such information is not a
requirement to verify income, assets, debt obligations, alimony and
child support using specified documents or to classify particular
inflows, property, and obligations as income, assets, debt obligations,
alimony, and child support, a creditor would need not comply with this
requirement to be eligible to receive a safe harbor as described in
comment 43(e)(2)(v)(B)-3.i.
Proposed comment 43(e)(2)(v)(B)-3.iv would clarify that a creditor
also complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
revised versions of standards that the Bureau would specify in comment
43(e)(2)(v)(B)-3, provided that the two versions are substantially
similar. This provision is intended to allow creditors to use new
versions of standards without the Bureau needing to amend the
commentary unless the new versions of the standards deviate in
important respects from the older versions of the standards.
Finally, proposed comment 43(e)(2)(v)(B)-3.v would clarify that a
creditor complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
the verification requirements in one or more of the standards the
Bureau would specify in comment 43(e)(2)(v)(B)-3.i. The proposed
comment would provide further that a creditor may, but need not, comply
with Sec. 1026.43(e)(2)(v)(B) by complying with the verification
requirements from more than one standard (in other words, by ``mixing
and matching'' verification requirements). For example, if a creditor
complies with the requirements in one of the standards the Bureau would
[[Page 41752]]
specify for when the creditor may use ``self-employment income,'' and
also complies with the requirements in a different standard the Bureau
would specify regarding certain vested assets, the creditor complies
with Sec. 1026.43(e)(2)(v)(B) and receives a safe harbor as described
in comment 43(e)(2)(v)(B)-3.i with respect to those determinations. A
creditor that chooses to comply with the verification requirements from
more than one standard need not satisfy all of the verification
requirements in each of the standards it uses.
The Bureau proposes these revisions because it preliminarily
concludes that they may help ensure that the Rule's verification
requirements are clear and detailed enough to provide creditors with
sufficient certainty about whether a loan satisfies the General QM loan
definition. Without such certainty, creditors may be less likely to
provide General QM loans to consumers, reducing the availability of
responsible, affordable mortgage credit to consumers. The Bureau also
seeks to ensure that the Rule's verification requirements are flexible
enough to adapt to emerging issues with respect to the treatment of
certain types of debt or income, advancing the provision of
responsible, affordable credit to consumers.
To further these objectives, the Bureau is proposing to remove the
requirement that creditors verify the consumer's income or assets, debt
obligations, alimony, and child support in accordance with appendix Q
and to add commentary clarifying that a creditor complies with Sec.
1026.43(e)(2)(v)(B) if it complies with verification standards the
Bureau would specify. The Bureau encourages stakeholders to develop
additional verification standards that the Bureau could incorporate
into the safe harbor set forth in proposed comment 43(e)(2)(v)(B)-3.
Stakeholder standards also could incorporate, in whole or in part, any
standards that the Bureau specifies as providing a safe harbor,
including mixing and matching these standards. The Bureau thus welcomes
the submission of stakeholder-developed verification standards and
would review any such standards for potential inclusion in the safe
harbor.
In the January 2013 Final Rule, the Bureau adopted the requirement
that creditors verify the consumer's income or assets, debt
obligations, alimony, and child support in accordance with appendix Q.
The Bureau believed this requirement would provide certainty to
creditors as to whether a loan meets the General QM loan definition and
would not deter creditors from providing QMs to consumers.\253\
However, appendix Q has not achieved this goal. The Assessment Report
highlighted three concerns with appendix Q. First, the Report stated
that appendix Q lacks the high degree of specific detail that is
provided by, for example, Fannie Mae's Seller Guide and Freddie Mac's
Seller/Servicer Guide.\254\ Second, the Report noted that there is a
perceived lack of clarity in appendix Q. As the Report noted,
commenters on the Assessment RFI stated that appendix Q ``is ambiguous
and leads to uncertainty'' and is ``confusing and unworkable,'' and
that ``additional guidance . . . is needed.'' \255\ Third, the Report
noted that appendix Q has been static since its adoption, while the
GSEs regularly update and adjust their guidelines in response to, among
other things, emerging issues with respect to the treatment of certain
types of debt or income.\256\ The Assessment Report found that such
concerns ``may have contributed to investors'--and at least
derivatively, creditors'--preference'' for Temporary GSE QM loans
instead of originating loans under the General QM loan definition.\257\
Commenters responding to the ANPR also raised similar concerns, but
some commenters also recommended maintaining appendix Q as an option
for compliance.
---------------------------------------------------------------------------
\253\ 78 FR 6408, 6523 (Jan. 30, 2013).
\254\ See Assessment Report, supra note 58, at 193.
\255\ Id.
\256\ Id. at 193-94.
\257\ Id. at 193.
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As described above in part III, the ANPR solicited comment on
whether the rule should retain appendix Q as the standard for
calculating and verifying debt and income.\258\ Nearly all commenters
agreed that appendix Q in its existing form is insufficient--
specifically, that the requirements lacked clarity in certain areas,
particularly with respect to the application of the standards to
consumers who are self-employed or otherwise have non-traditional
income. These commenters stated that this lack of clarity leaves
creditors uncertain of the QM status of some loans. Commenters also
criticized appendix Q for being overly prescriptive and outdated in
other areas and therefore lacking the flexibility to adapt to changing
market conditions. Commenters suggested that the Bureau supplement
appendix Q or replace it with reasonable alternatives that allow for
more flexibility, such as a general reasonability standard for
verifying income and debt or verification standards issued by the GSEs,
FHA, USDA, or VA. Commenters also stated that appendix Q hampers
innovation because it is incompatible with practices such as digital
underwriting. Although most commenters advocated for elimination of
appendix Q, the commenters that advocated for retaining appendix Q
generally suggested the Bureau should revise appendix Q to modernize
the standards and ease industry compliance.
---------------------------------------------------------------------------
\258\ Specifically, the Bureau sought comment on whether the
rule should retain appendix Q as the standard for verification if
the rule retains a direct measure of a consumer's personal finances
for General QM. Even though the Bureau is proposing to remove the
DTI ratio requirement, the question about retention of appendix Q
remains relevant because the proposal would require creditors to
verify income, assets, debt obligations, alimony, and child support.
---------------------------------------------------------------------------
The Bureau tentatively determines that, due to the well-founded and
consistent concerns described above, appendix Q does not provide
sufficient compliance certainty to creditors and does not provide
flexibility to adapt to emerging issues with respect to the treatment
of certain types of debt or income categories. The Bureau recognizes
that some findings in the Assessment Report suggest that the issues
raised by creditors with respect to appendix Q do not appear to have
had a substantial impact for certain loans. For example, although
creditors have stated that it may be difficult to comply with certain
appendix Q requirements for self-employed borrowers, the Assessment
Report noted that application data indicated that the approval rates
for non-high DTI, non-GSE eligible self-employed borrowers have
decreased by only two percentage points since the January 2013 Final
Rule became effective.\259\ The Bureau tentatively concludes, however,
that this limited decrease in approvals for such applications does not
undermine creditors' concerns that appendix Q's definitions of debt and
income are rigid and difficult to apply and do not provide the level of
compliance certainty that the Bureau anticipated in the January 2013
Final Rule. Additionally, the Assessment Report showed that about 40
percent of respondents to a lender survey indicated that they ``often''
or ``sometimes'' originate non-QM loans where the borrower could not
provide documentation required by appendix Q. The Bureau concluded that
these results left open the possibility that appendix Q requirements
may have had an impact on access to credit.\260\
---------------------------------------------------------------------------
\259\ See Assessment Report, supra note 58, at 11.
\260\ See id. at 155.
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The Bureau thus proposes to remove the appendix Q requirements from
[[Page 41753]]
Sec. 1026.43(e)(2)(v), and to remove appendix Q from Regulation Z
entirely. The Bureau proposes to remove appendix Q entirely in light of
concerns from creditors and investors that its perceived inflexibility,
ambiguity, and static nature result in standards that are both
confusing and outdated. The Bureau understands it would be time- and
resource-intensive to revise appendix Q in a manner that would resolve
these concerns. The Bureau tentatively concludes that a more efficient
and practicable solution is to propose to remove appendix Q entirely.
As described above, the proposal would instead provide that
creditors must verify income, assets, debt obligations, alimony, and
child support in accordance with the general ATR verification
provisions. The proposal would also provide a safe harbor for
compliance with Sec. 1026.43(e)(2)(v)(B) if a creditor complies with
verification requirements in standards the Bureau would specify in
comment 43(e)(2)(v)(B)-3. Because the Bureau believes that the general
ATR verification provisions and external standards the Bureau would
specify would provide a workable approach, and because the Bureau
preliminarily agrees that the existing concerns with appendix Q
discussed above have merit, the Bureau is not proposing to retain
appendix Q as an option for creditors to comply with the requirements
of Sec. 1026.43(e)(2)(v) to consider and verify a consumer's income,
assets, debt obligations, alimony, and child support. As proposed
comment 43(e)(2)(v)(B)-1 makes clear, creditors would still be required
to verify the consumer's income or assets in accordance with Sec.
1026.43(c)(4) and its commentary and verify the consumer's current debt
obligations, alimony, and child support in accordance with Sec.
1026.43(c)(3) and its commentary.
As noted above, the proposal would also provide a safe harbor for
compliance with Sec. 1026.43(e)(2)(v)(B) where a creditor complies
with verification requirements in standards the Bureau specifies. These
may include relevant provisions from Fannie Mae's Single Family Selling
Guide, Freddie Mac's Single-Family Seller/Servicer Guide, FHA's Single
Family Housing Policy Handbook, the VA's Lenders Handbook, and the
USDA's Field Office Handbook for the Direct Single Family Housing
Program as well as its Handbook for the Single Family Guaranteed Loan
Program, current as of this proposal's public release. All of these
verification standards are available to the public for free
online.\261\ As discussed above, the Bureau is also open to including
stakeholder-developed verification standards among this list of guides
such that a creditor's compliance with such verification standards
would provide conclusive evidence of compliance with Sec.
1026.43(e)(2)(v)(B).
---------------------------------------------------------------------------
\261\ The current versions of the guides (as of June 17, 2020)
are available on the respective Federal agency and GSE websites. The
current versions of the Federal agency guides noted above will be
posted with the proposed rule on https://www.regulations.gov. In the
event that the GSEs replace the current versions of the guides noted
above with new versions of the guides on their websites during the
comment period, the version current as of June 17, 2020 of Fannie
Mae's Single Family Selling Guide will be available at https://www.allregs.com/tpl/public/fnma_freesiteconv_tll.aspx, and the
version current as of June 17, 2020 of Freddie Mac's Single-Family
Seller/Servicer Guide will be available at https://www.allregs.com/tpl/public/fhlmc_freesite_tll.aspx.
---------------------------------------------------------------------------
The Bureau tentatively determines, based on extensive public
feedback and its own experience and review, that external standards
appear reasonable and would provide creditors with substantially
greater certainty about whether many loans satisfy the General QM loan
definition--particularly with respect to verifying income for self-
employed consumers, consumers with part-time employment, and consumers
with irregular or unusual income streams. The Bureau tentatively
determines that these types of income would be addressed more fully by
certain external standards than by appendix Q. The Bureau tentatively
determines that, as a result, this proposal would increase access to
responsible, affordable credit for consumers.
The Bureau emphasizes that a creditor would not be required to
comply with any of the verification requirements in the standards the
Bureau would specify in comment 43(e)(2)(v)(B)-3.i in order to comply
with Sec. 1026.43(e)(2)(v)(B). Rather, the Bureau is proposing to
clarify that compliance with these standards constitutes compliance
with the verification requirements of Sec. 1026.43(c)(3) and (c)(4)
and their commentary, which generally require creditors to verify
income, assets, debt obligations, alimony, and child support using
reasonably reliable third-party records. The Bureau tentatively
determines that this would help address the concerns of many creditors
and commenters that appendix Q has not facilitated adequate compliance
certainty.
The Bureau also tentatively determines that the proposal would
provide creditors with the flexibility to develop other methods of
compliance with the verification requirements of Sec.
1026.43(e)(2)(v)(B), consistent with Sec. 1026.43(c)(3) and (c)(4) and
their commentary, an option that the Bureau intends to address the
concerns of creditors and commenters that found appendix Q to be too
rigid or prescriptive. As explained in proposed comment 43(e)(2)(v)(B)-
1, Sec. 1026.43(e)(2)(v)(B) does not prescribe specific methods of
underwriting, and so long as a creditor complies with Sec.
1026.43(c)(3) and (c)(4), the creditor is permitted to use any
reasonable verification methods and criteria. Furthermore, as proposed
comment 43(e)(2)(v)(B)-3.v would clarify, creditors would have the
flexibility to ``mix and match'' the verification requirements in the
standards the Bureau would specify in comment 43(e)(2)(v)(B)-3.i, and
receive a safe harbor with respect to verification that is made
consistent with those standards.
The Bureau also proposes to explain in proposed comment
43(e)(2)(v)(B)-3.iv that a creditor complies with Sec.
1026.43(e)(2)(v)(B) if it complies with revised versions of the
standards the Bureau would specify in comment 43(e)(2)(v)(B)-3.i,
provided that the two versions are substantially similar. Many of the
standards that the Bureau could specify in comment 43(e)(2)(V)(B)-3.i,
such as GSE and Federal agency standards, are regularly updated in
response to emerging issues with respect to the treatment of certain
types of debt or income. This proposed comment would explain that the
safe harbor described in comment 43(e)(2)(v)(B)-3.i applies not only to
verification requirements in the specific versions of the standards
listed, but also revised versions of these standards, as long as the
revised version is substantially similar.
The Bureau is aware, based on comments received on the ANPR, that
some creditors would prefer that compliance with any future version of
the standards the Bureau specifies, rather than just the versions of
those standards the Bureau would specify in comment 43(e)(2)(v)(B)-3.i
(as well as any substantially similar version, under proposed comment
43(e)(2)(v)(B)-3.iv), be automatically deemed to constitute compliance
with the verification requirements of Sec. 1026.43(c)(3) and (c)(4).
However, such an approach would mean that any future revisions to those
standards by the third parties that issue them could cause significant
changes in the creditor obligations and consumer protections under the
Rule without review by the Bureau. For this reason, the Bureau is not
proposing such an approach.
[[Page 41754]]
As in the January 2013 Final Rule, the Bureau is proposing to
incorporate the requirement that the creditor verify the consumer's
current debt obligations, alimony, and child support into the
definition of a General QM loan in Sec. 1026.43(e)(2) pursuant to its
authority under TILA section 129C(b)(3)(B)(i). The Bureau is also
proposing the revisions to the commentary to Sec.
1026.43(e)(2)(v)(B)--including the clarification that a creditor
complies with the General QM loan verification requirement where it
complies with certain verification standards issued by third parties
that the Bureau would specify--pursuant to its authority under TILA
section 129C(b)(3)(B)(i). The Bureau tentatively finds that these
provisions would be necessary and proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
that is consistent with the purposes of TILA section 129C and necessary
and appropriate to effectuate the purposes of TILA section 129C, which
includes assuring that consumers are offered and receive residential
mortgage loans on terms that reasonably reflect their ability to repay
the loan.
The Bureau also proposes these provisions pursuant to its authority
under TILA section 105(a) to issue regulations that, among other
things, contain such additional requirements, other provisions, or that
provide for such adjustments for all or any class of transactions, that
in the Bureau's judgment are necessary or proper to effectuate the
purposes of TILA, which include the above purpose of section 129C,
among other things. The Bureau tentatively finds that these provisions
would be necessary and proper to achieve this purpose. In particular,
the Bureau tentatively finds that incorporating the requirement that a
creditor verify a consumer's current debt obligations, alimony, and
child support into the General QM loan criteria--as well as clarifying
that a creditor complies with the General QM verification requirement
where it complies with certain verification standards issued by third
parties that the Bureau would specify--would ensure that creditors
verify whether a consumer has the ability to repay a General QM loan.
Finally, the Bureau concludes that these regulatory amendments are
authorized by TILA section 129C(b)(2)(A)(vi), which permits, but does
not require, the Bureau to adopt guidelines or regulations relating to
debt-to-income ratios or alternative measures of ability to pay regular
expenses after payment of total monthly debt.
The Bureau seeks comment on proposed Sec. 1026.43(e)(2)(v)(B) and
related commentary, including on whether it should retain appendix Q as
an option for complying with the Rule's verification standards. In
addition, the Bureau requests comment on whether proposed Sec.
1026.43(e)(2)(v)(B) and related commentary would facilitate or create
obstacles to verification of income, assets, debt obligations, alimony,
and child support through automated analysis of electronic transaction
data from consumer account records. The Bureau also requests comment on
whether the Rule should include a safe harbor for compliance with
certain verification standards, as the Bureau proposes in proposed
comment 43(e)(2)(v)(B)-3, and, if so, what verification standards the
Bureau should specify for the safe harbor. The Bureau also requests
comment about the advantages and disadvantages of the verification
requirements in each possible standard the Bureau could specify for the
safe harbor, including: (1) Chapters B3-3 through B3-6 of the Fannie
Mae Single Family Selling Guide, published June 3, 2020; (2) sections
5102 through 5500 of the Freddie Mac Single-Family Seller/Servicer
Guide, published June 10, 2020; (3) sections II.A.1 and II.A.4-5 of the
FHA's Single Family Housing Policy Handbook, issued October 24, 2019;
(4) chapter 4 of the VA's Lenders Handbook, revised February 22, 2019;
(5) chapter 4 of the USDA's Field Office Handbook for the Direct Single
Family Housing Program, revised March 15, 2019; and (6) chapters 9
through 11 of the USDA's Handbook for the Single Family Guaranteed Loan
Program, revised March 19, 2020. In addition, the Bureau requests
comment on whether creditors that comply with standards that have been
revised but are substantially similar should receive a safe harbor, as
the Bureau proposes. The Bureau further seeks comment on whether the
Rule should include examples of revisions that might qualify as
substantially similar, and if so, what types of examples would provide
helpful clarification to creditors and other stakeholders. For example,
the Bureau seeks comment on whether it would be helpful to clarify that
a revision might qualify as substantially similar where it is a
clarification, explanation, logical extension, or application of a pre-
existing proposition in the standard. The Bureau also seeks comment on
its proposal to allow creditors to ``mix and match'' requirements from
verification standards, including whether examples of such ``mixing and
matching'' would be helpful and whether the Bureau should instead limit
or prohibit such ``mixing and matching,'' and why.
Finally, the Bureau requests comment on whether the Bureau should
specify in the safe harbor existing stakeholder standards or standards
that stakeholders develop that define debt and income. The Bureau seeks
comment on whether the potential inclusion or non-inclusion of Federal
agency or GSE verification standards in the safe harbor in the future
would further encourage stakeholders to develop such standards.
43(e)(2)(vi)
TILA section 129C(b)(2)(vi) states that the term ``qualified
mortgage'' includes any mortgage loan that complies with any guidelines
or regulations established by the Bureau relating to ratios of total
monthly debt to monthly income or alternative measure of ability to pay
regular expenses after payment of total monthly debt, taking into
account the income levels of the consumer and such other factors as the
Bureau may determine relevant and consistent with the purposes
described in TILA section 129C(b)(3)(B)(i). TILA section
129C(b)(3)(B)(i) authorizes the Bureau to revise, add to, or subtract
from the criteria that define a QM upon a finding that the changes are
necessary or proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner consistent with the
purposes of TILA section 129C, necessary and appropriate to effectuate
the purposes of TILA sections 129C and 129B, to prevent circumvention
or evasion thereof, or to facilitate compliance with TILA sections 129C
and 129B. Current Sec. 1026.43(e)(2)(vi) implements TILA section
129C(b)(2)(vi), consistent with TILA section 129C(b)(3)(B)(i), and
provides that, as a condition to be a General QM loan under Sec.
1026.43(e)(2), the consumer's total monthly DTI ratio may not exceed 43
percent. Section 1026.43(e)(2)(vi) further provides that the consumer's
total monthly DTI ratio is generally determined in accordance with
appendix Q.
For the reasons described in part V above, the Bureau is proposing
to remove the 43 percent DTI limit in current Sec. 1026.43(e)(2)(vi)
and replace it with a price-based approach. The proposal also would
require a creditor to consider and verify the consumer's debt, income,
and monthly DTI ratio or residual income. Specifically, the Bureau
proposes to remove the text of current Sec. 1026.43(e)(2)(vi) and to
[[Page 41755]]
provide instead that, to be a General QM loan under Sec.
1026.43(e)(2), the APR may not exceed APOR for a comparable transaction
as of the date the interest rate is set by the amounts specified in
Sec. 1026.43(e)(2)(vi)(A) through (E).\262\ Proposed Sec.
1026.43(e)(2)(vi)(A) through (E) would provide specific rate spread
thresholds for purposes of Sec. 1026.43(e)(2), including higher
thresholds for small loan amounts and subordinate-lien transactions.
Proposed Sec. 1026.43(e)(2)(vi)(A) would provide that for a first-lien
covered transaction with a loan amount greater than or equal to
$109,898 (indexed for inflation), the APR may not exceed APOR for a
comparable transaction as of the date the interest rate is set by two
or more percentage points. Proposed Sec. 1026.43(e)(2)(vi)(B) and (C)
would provide higher thresholds for smaller first-lien covered
transactions. Proposed Sec. 1026.43(e)(2)(vi)(D) and (E) would provide
higher thresholds for subordinate-lien covered transactions. Loans
priced at or above the thresholds in proposed Sec.
1026.43(e)(2)(vi)(A) through (E) would not be eligible for QM status
under Sec. 1026.43(e)(2). The proposal would also provide that the
loan amounts specified in Sec. 1026.43(e)(2)(vi)(A) through (E) be
adjusted annually for inflation based on changes in the Consumer Price
Index for All Urban Consumers (CPI-U).
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\262\ As explained above in the section-by-section discussion of
Sec. 1026.43(e)(2)(v)(A), the Bureau is proposing to move to Sec.
1026.43(e)(2)(v)(A) the provisions in existing Sec.
1026.43(e)(2)(vi)(B), which specify that the consumer's monthly DTI
ratio is determined using the consumer's monthly payment on the
covered transaction and any simultaneous loan that the creditor
knows or has reason to know will be made.
---------------------------------------------------------------------------
Proposed Sec. 1026.43(e)(2)(vi) would also provide a special rule
for determining the APR for purposes of determining a loan's status as
a General QM loan under Sec. 1026.43(e)(2) for certain ARMs and other
loans for which the interest rate may or will change in the first five
years of the loan. Specifically, proposed Sec. 1026.43(e)(2)(vi) would
provide that, for purposes of Sec. 1026.43(e)(2)(vi), the creditor
must determine the APR for a loan for which the interest rate may or
will change within the first five years after the date on which the
first regular periodic payment will be due by treating the maximum
interest rate that may apply during that five-year period as the
interest rate for the full term of the loan.
The Bureau is proposing these revisions to Sec. 1026.43(e)(2)(vi)
for the reasons set forth above in part V. As explained above, the
Bureau is proposing to remove the 43 percent DTI limit in current Sec.
1026.43(e)(2)(vi) and replace it with a price-based approach because
the Bureau is concerned that retaining the existing General QM loan
definition with the 43 percent DTI limit after the expiration of
Temporary GSE QM loan definition expires would significantly reduce the
size of QM and could significantly reduce access to responsible,
affordable credit. The Bureau is proposing a price-based approach to
replace the specific DTI limit approach because it is concerned that
imposing a DTI limit as a condition for QM status under the General QM
loan definition may be overly burdensome and complex in practice and
may unduly restrict access to credit because it provides an incomplete
picture of the consumer's financial capacity. The Bureau preliminarily
concludes that a price-based General QM loan definition is appropriate
because a loan's price, as measured by comparing a loan's APR to APOR
for a comparable transaction, is a strong indicator of a consumer's
ability to repay and is a more holistic and flexible measure of a
consumer's ability to repay than DTI alone.
The Bureau also proposes to remove current comment 43(e)(2)(vi)-1,
which relates to the calculation of monthly payments on a covered
transaction and for simultaneous loans for purposes of calculating the
consumer's DTI ratio under current Sec. 1026.43(e)(2)(vi). The Bureau
believes this comment would be unnecessary under the proposal to move
the text of current Sec. 1026.43(e)(2)(vi) and revise it to remove the
references to appendix Q. The Bureau proposes to replace current
comment 43(e)(2)(vi)-1 with a cross-reference to comments 43(b)(4)-1
through -3 for guidance on determining APOR for a comparable
transaction as of the date the interest rate is set. The Bureau also
proposes new comment 43(e)(2)(vi)-2, which provides that a creditor
must determine the applicable rate spread threshold based on the face
amount of the note, which is the ``loan amount'' as defined in Sec.
1026.43(b)(5). In addition, the Bureau proposes comment 43(e)(2)(vi)-3
in which it will publish the annually adjusted loan amounts to reflect
changes in the CPI-U. The Bureau also proposes new comment
43(e)(2)(vi)-4, which explains the proposed special rule that, for
purposes of Sec. 1026.43(e)(2)(vi), the creditor must determine the
APR for a loan for which the interest rate may or will change within
the first five years after the date on which the first regular periodic
payment will be due by treating the maximum interest rate that may
apply during that five-year period as the interest rate for the full
term of the loan. The guidance provided in proposed comment
43(e)(2)(vi)-4 is discussed further, below.
The Bureau proposes to adopt a price-based approach to defining
General QM loans in Sec. 1026.43(e)(2)(vi) pursuant to its authority
under TILA section 129C(b)(3)(B)(i). The Bureau preliminarily concludes
that a price-based approach to the General QM loan definition is
necessary and proper to ensure that responsible, affordable mortgage
credit remains available to consumers in a manner that is consistent
with the purposes of TILA section 129C and is necessary and appropriate
to effectuate the purposes of TILA section 129C, which includes
assuring that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the loan.
As noted above, the Bureau is concerned that, when the Temporary GSE QM
loan definition expires, there would be a significant reduction in
access to credit if the Bureau retained the existing General QM loan
definition with the 43 percent DTI limit. The Bureau preliminarily
concludes that a price-based General QM loan definition is appropriate
because a loan's price, as measured by comparing a loan's APR to APOR
for a comparable transaction, is a strong indicator of a consumer's
ability to repay. Further, the Bureau preliminarily concludes that a
price-based approach is a more holistic and flexible measure of a
consumer's ability to repay than DTI ratios alone, and therefore would
better promote access to credit by providing QM status to consumers
with DTI ratios above 43 percent for whom it may be appropriate to
presume ability to repay. As such, the Bureau preliminarily concludes
that a price-based approach to the General QM loan definition would
both ensure that responsible, affordable mortgage credit remains
available to consumers and assure that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loan. For these same reasons, the Bureau
also proposes to adopt a price-based requirement in Sec.
1026.43(e)(2)(vi) pursuant to its authority under TILA section 105(a)
to issue regulations that, among other things, contain such additional
requirements or other provisions, or that provide for such adjustments
for all or any class of transactions, that in the Bureau's
[[Page 41756]]
judgment are necessary or proper to effectuate the purposes of TILA,
which include the above purpose of section 129C, among other things.
The Bureau preliminarily concludes that the price-based addition to the
QM criteria is necessary and proper to achieve this purpose, for the
reasons described above. Finally, the Bureau preliminarily concludes a
price-based approach is authorized by TILA section 129C(b)(2)(A)(vi),
which permits, but does not require, the Bureau to adopt guidelines or
regulations relating to DTI ratios or alternative measures of ability
to pay regular expenses after payment of total monthly debt.
The General QM Loan Pricing Thresholds
Proposed Sec. 1026.43(e)(2)(vi)(A) would establish the pricing
threshold for most General QM loans. Specifically, proposed Sec.
1026.43(e)(2)(vi)(A) would provide that, for a first-lien covered
transaction with a loan amount greater than or equal to $109,898
(indexed for inflation), the APR may not exceed APOR for a comparable
transaction as of the date the interest rate is set by two or more
percentage points. Loans that are priced at or above the two-percentage
point threshold would not be eligible for QM status under Sec.
1026.43(e)(2), except that, as discussed below, the proposal provides
higher thresholds for loans with smaller loan amounts and for
subordinate-lien transactions. As discussed above, for all loans, the
proposal preserves the current thresholds in Sec. 1026.43(e)(1)(i)
that separate safe harbor from rebuttable presumption QMs, so that a
loan that otherwise meets the General QM loan definition is a safe
harbor QM if its APR exceeds APOR for a comparable transaction as of
the date the interest rate was set by less than 1.5 percentage points
for first-lien transactions, or 3.5 percentage points for subordinate-
lien transactions. Under the proposal, all other QM loans would
continue to be considered rebuttable presumption QMs under Sec.
1026.43(e)(1)(ii).
In considering pricing thresholds for the General QM loan
definition, the Bureau has placed particular emphasis on balancing
considerations related to ensuring consumers' ability to repay with
maintaining access to responsible, affordable mortgage credit. The
Bureau tentatively concludes that, in general, a two-percentage-point-
over-APOR threshold would strike the appropriate balance between these
two objectives.
As explained above, the Bureau uses early delinquency rates as a
proxy for measuring whether a consumer had a reasonable ability to
repay at the time the loan was consummated. Here, the Bureau analyzed
early delinquency rates in considering the pricing thresholds at which
a loan should be presumed to comply with the ATR provisions. The Bureau
analyzed NMDB and HMDA data to assess early delinquency rates for
first-lien purchase originations, using both DTI and rate spread. The
data are summarized in Tables 1 through 6, above. Tables 5 and 6 show
the early delinquency rates for samples of loans categorized by both
their DTI and their rate spread.
Table 5 shows early delinquency rates for 2002-2008 first-lien
purchase originations in the NMDB. The 2002-2008 time period
corresponds to a market environment that, in general, demonstrates
looser, higher-risk credit conditions.\263\ The Bureau's analyses found
direct correlations between rate spreads and early delinquency rates
across all DTI ranges reviewed. Loans with low rate spreads had
relatively low early delinquency rates even at high DTI levels. The
highest early delinquency rates corresponded to loans with both high
rate spreads and high DTI ratios. For loans with DTI ratios of 41 to 43
percent--the category in Table 5 that includes the current DTI limit of
43 percent--the early delinquency rates reached 16 percent at rate
spreads including and above 2.25 percentage points over APOR. At rate
spreads inclusive of 1.75 through 1.99 percentage points over APOR--the
category that is just below the proposed two-percentage-point rate
spread threshold--the early delinquency rate reached 22 percent for DTI
ratios of 61 to 70 percent. At DTI ratios of 41 to 43 percent and rate
spreads inclusive of 1.75 through 1.99 percentage points over APOR, the
early delinquency rate is 15 percent.
---------------------------------------------------------------------------
\263\ Characteristics of a high-risk credit market include very
high unemployment and falling home prices.
---------------------------------------------------------------------------
Table 6 shows average delinquency statistics for 2018 NMDB first-
lien purchase originations that have been matched to 2018 HMDA data. In
contrast to Table 5, the time period in Table 6 corresponds to a market
environment that, in general, demonstrates tighter, lower-risk credit
conditions.\264\ In the 2018 data in Table 6, early delinquency rates
also increased as rate spreads increased across each range of DTI
ratios analyzed, although the overall performance of loans in the Table
6 dataset was significantly better than those represented in Table 5.
For loans with DTI ratios of 36 to 43 percent--the category in Table 6
that includes the current DTI limit of 43 percent--early delinquency
rates reached 3.9 percent (at rate spreads of at least 2 percentage
points). The highest early delinquency rate associated with the
proposed rate spread threshold (less than 2 percentage points over
APOR) is 3.2 percent and corresponds to loans with the DTI ratios of 26
to 35 percent. At the same rate spread threshold, the early delinquency
rate for the loans with the highest DTI ratios is 2.3 percent.\265\
---------------------------------------------------------------------------
\264\ Characteristics of a low-risk credit market include very
low unemployment and rising home prices. As noted above, this more
recent sample of data provides insight into early delinquency rates
under post-crisis lending standards for a dataset of loans that had
not undergone an economic downturn.
\265\ The apparent anomalies in the progression of the early
delinquency rates across DTI ratios at the higher rate spread
categories in Table 6 is likely because there are relatively few
loans in the 2018 data with the indicated combinations of higher
rate spreads and lower DTI ratios and some creditors require that
consumers demonstrate more compensating factors on higher DTI loans.
---------------------------------------------------------------------------
Although in Tables 5 and 6 delinquency rates rise with rate spread,
there is no clear point at which delinquency rates accelerate.
Comparisons between a high-risk credit market (Table 5) and a low-risk
credit market (Table 6) show substantial expansion of early delinquency
rates during an economic downturn across all rate spreads and DTI
ratios. Data show that, for example, prime loans that experience a 0.2
percent early delinquency rate in a low-risk market might experience a
2 percent early delinquency rate in a higher-risk market, while
subprime loans with a 4.2 percent early delinquency rate in a low-risk
market might experience a 19 percent early delinquency rate in a
higher-risk market.
As discussed above, other analyses reviewed by the Bureau also show
a strong positive correlation of delinquency rates with interest rate
spreads.\266\ Collectively, this evidence suggests that higher rate
spreads--including the specific measure of APR over APOR--are strongly
correlated with future early delinquency rates. The Bureau expects
that, for loans just below the respective thresholds, a pricing
threshold of two percentage points over APOR would generally result in
similar or somewhat higher early delinquency rates relative to the
current DTI limit of 43 percent. However, Bureau analysis shows the
early delinquency rate for this set of loans is on par with loans that
have received QM status under the Temporary GSE QM loan definition.
Restricting the sample of 2018 NMDB-
[[Page 41757]]
HMDA matched first-lien conventional purchase originations to only
those purchased and guaranteed by the GSEs, loans with rate spreads at
or above 2 percentage points had an early delinquency rate of 4.2
percent, higher than the maximum early delinquency rates observed for
loans with rate spreads below 2 percentage points in either Table 2
(2.7 percent) or Table 6 (3.2 percent).\267\ Consequently, the Bureau
does not believe that the price-based approach would result in
substantially higher delinquency rates than the standard included in
the current rule. Although some commenters on the ANPR recommended rate
spread thresholds as high as 2.5 percentage points over APOR, the
Bureau is not proposing a higher General QM threshold for most loans
because of concerns that such loans would have high predicted
delinquency rates, which appears inconsistent with the goal of assuring
that consumers of loans that receive QM status and the resulting
presumption of compliance with the ATR requirements do, in fact, have
ability to repay.
---------------------------------------------------------------------------
\266\ See discussion of data and analyses provided by CoreLogic
and the Urban Institute, in part V, above.
\267\ This comparison uses 2018 data on GSE originations because
such loans were originated while the Temporary GSE QM loan
definition was in effect and the GSEs were in conservatorship. GSE
loans from the 2002 to 2008 period were originated under a different
regulatory regime and with different underwriting practices (e.g.,
GSE loans more commonly had DTI ratios over 50 percent during the
2002 to 2008 period), and thus may not be directly comparable to
loans made under the Temporary GSE QM loan definition.
---------------------------------------------------------------------------
The Bureau has used 2018 HMDA data to estimate that 95.8 percent of
conventional purchase loans currently meet the criteria to be defined
as QMs, including under the Temporary GSE QM loan definition. The
Bureau also uses 2018 HMDA data to project that the proposed two-
percentage-point-over-APOR threshold would result in a 96.1 percent
market share for QMs with an adjustment for small loans, as discussed
below.\268\ Creditors may also respond to such a threshold by lowering
pricing on some loans near the threshold, further increasing the QM
market share. Therefore, using the size of the QM market as an
indicator of access to credit, the Bureau expects that a pricing
threshold of two percentage points over APOR, in combination with the
proposed adjustments for small loans, would result in an expansion of
access to credit as compared to the current rule including the
Temporary GSE QM loan definition, particularly as creditors are likely
to adjust pricing in response to the rule, allowing additional loans to
obtain QM status.\269\ Further, the proposal would result in a
substantial expansion of access to credit as compared to the current
rule without the Temporary GSE QM loan definition, under which only an
estimated 73.6 percent of conventional purchase loans would be QMs.
---------------------------------------------------------------------------
\268\ The Bureau estimates that alternative QM pricing
thresholds of 1.5, 1.75, 2.25, and 2.5 percentage points over APOR
would result in QM market shares of 94.3, 95.3, 96.6, and 96.8
percent, respectively.
\269\ The Bureau acknowledges, however, that some loans that do
not meet the current General QM loan definition, but that would be
General QMs under the proposed price-based approach, would have been
made under other QM definitions (e.g., FHA, small-creditor QM).
---------------------------------------------------------------------------
The Bureau is concerned that rate spread thresholds lower than two
percentage points over APOR could result in a significant reduction in
access to credit when the Temporary GSE QM definition expires. This is
especially true given the modest amount of non-QM lending identified in
the Bureau's Assessment Report, and the recent sharp reduction in that
lending in recent months. The Bureau is also concerned that a rate
spread threshold higher than two percentage points over APOR would
define a QM boundary that substantially covers the entire mortgage
market, except for loans with statutorily prohibited features,
including loans for which the early delinquency rate suggests the
consumer may not have had a reasonable ability to repay at
consummation.
The Bureau preliminarily concludes that, for most first-lien
covered transactions, a threshold of two percentage points over APOR is
an appropriate criterion to include in the definition of General QM in
Sec. 1026.43(e)(2)(vi). This proposed threshold would appropriately
balance the certainty provided to the market from ensuring that loans
afforded QM status may be presumed to comply with the ATR provisions,
with assurances that access to responsible, affordable mortgage credit
remains available to consumers.
The Bureau requests comment on whether the final rule should
establish in Sec. 1026.43(e)(2)(vi)(A) a different rate spread
threshold and, if so, what the threshold should be. The Bureau requests
comment on whether the General QM rate spread threshold should be
higher than 2 percentage points over APOR. For commenters suggesting a
higher rate spread threshold, the Bureau requests commenters provide
data or other analysis that would support providing QM status to such
loans, which the Bureau expects would have higher risk profiles. The
Bureau also requests comment on whether the General QM rate spread
threshold should be set lower than 2 percentage points over APOR. For
commenters suggesting a lower rate spread threshold, the Bureau
requests commenters provide data or other analysis that would show that
adopting a lower threshold would not have adverse effects on access to
credit. All commenters are encouraged to include data or other analysis
to support their recommendations for a particular threshold, including
the proposed two-percentage-point-over-APOR threshold. The Bureau also
seeks comments on whether creditors may be expected to change lending
practices in response to the addition of any rate spread threshold in
the definition of General QM (for example, by lowering interest rates
to fit within rate spread thresholds), and how that would affect the
size of the QM market. In addition, in light of the concerns about the
sensitivity of a price-based QM definition to macroeconomic cycles, the
Bureau requests comment on whether the Bureau should consider adjusting
the pricing thresholds in emergency situations and, if so, how the
Bureau should do so.
Thresholds for Smaller Loans and Subordinate-Lien Transactions
Proposed Sec. 1026.43(e)(2)(vi)(B) and (C) would establish higher
pricing thresholds for smaller loans, and loans priced at or above the
proposed thresholds would not be eligible for QM status under Sec.
1026.43(e)(2). Specifically, proposed Sec. 1026.43(e)(2)(vi)(B) would
provide that, for first-lien covered transactions with loan amounts
greater than or equal to $65,939 but less than $109,898,\270\ the
threshold would be 3.5 percentage points over APOR. Proposed Sec.
1026.43(e)(2)(vi)(C) would provide that, for first-lien covered
transactions with loan amounts less than $65,939, the threshold would
be 6.5 percentage points over APOR.
---------------------------------------------------------------------------
\270\ The Bureau is proposing $65,939, rather than a threshold
such as $60,000 or $65,000, and $109,898, rather than a threshold
such as $100,000 or $110,000, because the proposed thresholds align
with certain thresholds for the limits on points and fees, as
updated for inflation, in Sec. 1026.43(e)(3)(i) and the associated
commentary. The Bureau will update these loan amounts if the
corresponding dollar amounts for Sec. 1026.43(e)(3)(i) and the
associated commentary are updated before this final rule becomes
effective, in order to ensure that the loan amounts for this
provision and Sec. 1026.43(e)(3) remain synchronized.
---------------------------------------------------------------------------
Proposed Sec. 1026.43(e)(2)(vi)(D) and (E) would establish higher
thresholds for subordinate-lien transactions, with different thresholds
depending on the size of the transaction. Subordinate-lien transactions
priced at or above the proposed thresholds would not be
[[Page 41758]]
eligible for QM status under Sec. 1026.43(e)(2). Specifically,
proposed Sec. 1026.43(e)(2)(vi)(D) would provide that, for
subordinate-lien covered transactions with loan amounts greater than or
equal to $65,939, the threshold would be 3.5 percentage points over
APOR. Proposed Sec. 1026.43(e)(2)(vi)(E) would provide that, for
subordinate-lien covered transactions with loan amounts less than
$65,939, the threshold would be 6.5 percentage points over APOR.
The proposal would also provide that the loan amounts specified in
Sec. 1026.43(e)(2)(vi)(A) through (E) be adjusted annually for
inflation based on changes in CPI-U. Specifically, the Bureau would
adjust the loan amounts in Sec. 1026.43(e)(2)(vi) annually on January
1 by the annual percentage change in the CPI-U that was reported on the
preceding June 1. The Bureau would publish adjustments in new comment
43(e)(2)(vi)-3 after the June figures become available each year.
The Bureau is proposing higher thresholds for smaller loans because
it is concerned that loans with smaller loan amounts are typically
priced higher than loans with larger loan amounts, even though a
consumer with a smaller loan may have similar credit characteristics
and ability to repay. Many of the creditors' costs for a transaction
may be the same or similar, regardless of the loan amount. For
creditors to recover their costs for smaller loans, they may have to
charge higher interest rates or higher points and fees as a percentage
of the loan amounts than they would for comparable larger loans. As a
result, smaller loans may have higher APRs than larger loans to
consumers with similar credit characteristics and who may have a
similar ability to repay. As discussed below, the Bureau's analysis
indicates that consumers who take out smaller loans with APRs within
higher thresholds may have similar credit characteristics as consumers
who take out larger loans. The Bureau's analysis also indicates that
smaller loans with APRs within higher thresholds may have comparable
levels of early delinquencies as larger loans within lower thresholds.
However, as explained further below, the Bureau's analysis of
delinquency levels for smaller loans, compared to larger loans, does
not appear to indicate a threshold at which delinquency levels
significantly accelerate.
The Bureau is concerned that adopting the same threshold of two
percentage points above APOR for all loans could disproportionately
prevent smaller loans from being originated as General QM loans. In
particular, the Bureau's analysis indicates that without higher
thresholds for smaller loans, loans for manufactured housing and loans
to minority consumers could disproportionately be excluded from being
originated as General QM loans. The Bureau's analysis of 2018 HMDA data
found that 57.9 percent of manufactured housing loans are priced two
percentage points or more over APOR. The Bureau's analysis also found
that 5.1 percent of site-built loans to minority consumers are priced
two percentage points or more over APOR, but 3.5 percent of site-built
loans to non-Hispanic white consumers are priced two percentage points
or more over APOR. While some loans may be originated under other QM
definitions or as non-QM loans, those loans may be meaningfully more
expensive, and some loans may not be originated at all. As discussed in
part V, the non-QM market has been slow to develop, and the negative
impact on the non-QM market from the disruptions caused by the COVID-19
pandemic raises further concerns about the capacity of the non-QM
market to provide consumers with access to credit through such loans.
The Bureau also notes that, in the Dodd-Frank Act, Congress
provided for additional pricing flexibility for creditors making
smaller loans, allowing smaller loans to include higher points and fees
while still meeting the QM definition. TILA section 129C(b)(2)(A)(vi)
defines a QM as a loan for which, among other things, the total points
and fees payable in connection with the loan do not exceed 3 percent of
the total loan amount. However, TILA section 129C(b)(2)(D) requires the
Bureau to prescribe rules adjusting the points-and-fees limits for
smaller loans. In the January 2013 Final Rule, the Bureau implemented
this requirement in Sec. 1026.43(e)(3), adopting higher points-and-
fees thresholds for different tiers of loan amounts less than or equal
to $100,000, adjusted for inflation. The Bureau's preliminary
conclusion that creditors originating smaller loans typically impose
higher points and fees or higher interest rates to recover their costs,
regardless of the consumer's creditworthiness, and that higher
thresholds for smaller loans in Sec. 1026.43(e)(2)(vi) may, therefore,
be appropriate, is consistent with the statutory directive to adopt
higher points-and-fees thresholds for smaller loans.
To develop the proposed thresholds for smaller loans in Sec.
1026.43(e)(2)(vi)(B) and (C), the Bureau analyzed evidence related to
credit characteristics and loan performance for first-lien purchase
transactions at various rate spreads and loan amounts (adjusted for
inflation) using HMDA and NMDB data, as shown in Table 9.\271\
---------------------------------------------------------------------------
\271\ See Bureau of Labor and Statistics, Historical Consumer
Price Index for All Urban Consumers (CPI-U), https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202004.pdf. (Using
the CPI-U price index, nominal loan amounts are inflated to June
2019 dollars from the price level in June of the year prior to
origination. This effectively categorizes loans according to the
inflation-adjusted thresholds for smaller loans that would have been
in effect on the origination date.)
Table 9--Loan Characteristics and Performance for Different Sizes of First-Lien Transactions at Various Rate Spreads
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent Percent
observed 60+ observed 60+
Rate spread range Mean credit days days
Loan size group (percentage points over Mean CLTV, Mean DTI, 2018 score, 2018 delinquent delinquent
APOR) 2018 HMDA HMDA HMDA within first within first
2 years, 2002- 2 years, 2018
2008 NMDB NMDB
--------------------------------------------------------------------------------------------------------------------------------------------------------
Under $65,939............................. 1.5-2.0..................... 81.9 32.3 717 6.1% 2.8%
Under $65,939............................. 1.5-2.5..................... 82.2 32.3 714 6.1% 2.3%
Under $65,939............................. 1.5-3.0..................... 82.1 32.2 714 6.2% 2.3%
Under $65,939............................. 1.5-3.5..................... 81.9 32.1 715 6.2% 2.5%
Under $65,939............................. 1.5-4.0..................... 81.7 32.3 714 6.3% 2.5%
[[Page 41759]]
Under $65,939............................. 1.5-4.5..................... 81.7 32.5 710 6.4% 2.6%
Under $65,939............................. 1.5-5.0..................... 81.7 32.6 706 6.4% 2.5%
Under $65,939............................. 1.5-5.5..................... 81.6 32.7 699 6.5% 2.4%
Under $65,939............................. 1.5-6.0..................... 81.7 32.9 694 6.5% 2.5%
Under $65,939............................. 1.5-6.5..................... 81.9 33.1 685 6.5% 3.4%
Under $65,939............................. 1.5 and above............... 82.0 33.3 676 6.6% 4.1%
$65,939 to $109,897....................... 1.5-2.0..................... 89.9 35.5 704 11.1% 3.4%
$65,939 to $109,897....................... 1.5-2.5..................... 90.1 35.4 702 12.2% 4.2%
$65,939 to $109,897....................... 1.5-3.0..................... 90.0 35.5 702 12.9% 4.2%
$65,939 to $109,897....................... 1.5-3.5..................... 89.7 35.5 703 13.0% 4.3%
$65,939 to $109,897....................... 1.5-4.0..................... 89.4 35.6 703 13.1% 4.0%
$65,939 to $109,897....................... 1.5-4.5..................... 89.3 35.7 701 13.2% 4.2%
$65,939 to $109,897....................... 1.5-5.0..................... 89.1 35.8 699 13.3% 4.1%
$65,939 to $109,897....................... 1.5-5.5..................... 89.1 35.9 696 13.4% 4.0%
$65,939 to $109,897....................... 1.5-6.0..................... 89.2 36.0 692 13.4% 4.2%
$65,939 to $109,897....................... 1.5-6.5..................... 89.3 36.1 684 13.4% 4.5%
$65,939 to $109,897....................... 1.5 and above............... 89.3 36.1 684 13.7% 4.5%
$109,898 and above........................ 1.5-2.0 (for comparison).... 92.7 39.4 698 14.9% 2.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Bureau's analysis indicates that consumers with smaller loans
with APRs within higher potential thresholds, such as 6.5 or 3.5
percentage points above APOR, have similar credit characteristics as
consumers with larger loans between 1.5 and 2 percentage points above
APOR.\272\ More specifically, the Bureau analyzed 2018 HMDA data on
first-lien conventional purchase loans and found that loans below
$65,939 that are priced between 1.5 and 6.5 percentage points above
APOR have a mean DTI ratio of 33.1 percent, a mean combined LTV ratio
of 81.9 percent, and a mean credit score of 685. Loans equal to or
greater than $65,939 but less than $109,898 that are priced between 1.5
and 3.5 percentage points above APOR have a mean DTI ratio of 35.5
percent, a mean combined LTV of 89.7 percent, and a mean credit score
of 703. Loans equal to or greater than $109,898 that are priced between
1.5 and 2 percentage points above APOR have a mean DTI ratio of 39.4
percent, a mean combined LTV of 92.7 percent, and a mean credit score
of 698. These all suggest that the credit characteristics, and
potentially the ability to repay, of consumers taking out smaller loans
with higher APRs, may be at least comparable to those of consumers
taking out larger loans with lower APRs.
---------------------------------------------------------------------------
\272\ Portfolio loans made by small creditors, as defined in
Sec. 1026.35(b)(2)(iii)(B) and (C), are excluded, as such loans are
likely Small Creditor QMs pursuant to Sec. 1026.43(e)(5) regardless
of pricing.
---------------------------------------------------------------------------
With respect to early delinquencies, the evidence summarized in
Table 9 generally provides support for higher thresholds for smaller
loans. Loans less than $65,939 had lower delinquency rates than loans
between $65,939 and $109,897 across all rate spread ranges and had
delinquency rates lower than or comparable to larger loans (equal to or
greater than $109,898) priced between 1.5 and 2 percentage points above
APOR. Loans between $65,939 and $109,897 had lower delinquency rates
than larger loans between 2002 and 2008, but higher delinquency rates
for 2018 loans.
More specifically, the Bureau analyzed NMDB data from 2002 through
2008 on first-lien conventional purchase loans and found that loans
below $65,939 that were priced between 1.5 and 6.5 percentage points
above APOR had an early delinquency rate of 6.5 percent. Loans equal to
or greater than $65,939 but less than $109,898 that were priced between
1.5 and 3.5 percentage points above APOR had an early delinquency rate
of 13 percent. Loans equal to or greater than $109,898 that were priced
between 1.5 and 2 percentage points above APOR had an early delinquency
rate of 14.9 percent. These rates suggest that the historical loan
performance of smaller loans with higher APRs may be comparable, if not
better, than larger loans with lower APRs.
However, the Bureau's analysis found that early delinquency rates
for 2018 loans are somewhat higher for smaller loans with higher APRs
than larger loans with lower APRs. More specifically, NMDB data from
2018 on first-lien conventional purchase loans show that loans below
$65,939 that were priced between 1.5 and 6.5 percentage points above
APOR had an early delinquency rate of 3.4 percent. Loans equal to or
greater than $65,939 but less than $109,898 that were priced between
1.5 and 3.5 percentage points above APOR had an early delinquency rate
of 4.3 percent. Loans equal to or greater than $109,898 that were
priced between 1.5 and 2 percentage points above APOR had an early
delinquency rate of 2.5 percent.
Although the current data do not appear to indicate a particular
threshold at which the credit characteristics or loan performance for
smaller loans with higher APRs decline significantly, the Bureau
preliminarily concludes that the proposed thresholds in Sec.
1026.43(e)(2)(vi)(B) and (C) for smaller, first-lien covered
transactions would strike the right balance in delineating which loans
should be eligible for a rebuttable presumption of compliance with the
ATR requirements. The Bureau believes the proposed thresholds may help
ensure that responsible, affordable credit remains available to
consumers taking out smaller loans, in particular loans for
manufactured housing and loans to minority consumers, while also
helping to ensure that the risks are limited so
[[Page 41760]]
that it would be appropriate for those loans to receive a rebuttable
presumption of compliance with the ATR requirements.
The Bureau is proposing higher thresholds in Sec.
1026.43(e)(2)(vi)(D) and (E) for subordinate-lien transactions because
it is concerned that subordinate-lien transactions may be priced higher
than comparable first-lien transactions for reasons other than
consumers' ability to repay. In general, the creditor of a subordinate
lien will recover its principal, in the event of default and
foreclosure, only to the extent funds remain after the first-lien
creditor recovers its principal. Thus, to compensate for this risk,
creditors typically price subordinate-lien transactions higher than
first-lien transactions, even though the consumer in the subordinate-
lien transaction may have similar credit characteristics and ability to
repay. In addition, subordinate-lien transactions are often for smaller
loan amounts, so the pricing factors discussed above for smaller loan
amounts may further increase the price of subordinate-lien transaction,
regardless of the consumer's ability to repay. The Bureau is concerned
that, to the extent the higher pricing for subordinate-lien transaction
is not related to consumers' ability to repay, subordinate-lien
transactions may be inappropriately excluded from QM status under Sec.
1026.43(e)(2) if the pricing thresholds for subordinate-lien
transactions are not increased.
In the January 2013 Final Rule, the Bureau adopted higher
thresholds for determining when subordinate-lien QMs received a
rebuttable presumption or a conclusive presumption of compliance with
the ATR requirements. For subordinate-lien transactions, the definition
of ``higher-priced covered transaction'' in Sec. 1026.43(b)(4) is used
in Sec. 1026.43(e)(1) to set a threshold of 3.5 percentage points
above APOR to determine which subordinate-lien QMs receive a safe
harbor and which receive a rebuttable presumption of compliance. As
discussed above in part V, the Bureau is not proposing to alter the
threshold for subordinate-lien transactions in Sec. 1026.43(b)(4). To
avoid the odd result that a subordinate-lien transaction would
otherwise be eligible to receive a safe harbor under Sec.
1026.43(b)(4) and (e)(1) but would not be eligible for QM status under
Sec. 1026.43(e)(2)(vi), the Bureau considered which threshold or
thresholds at or above 3.5 percentage points above APOR may be
appropriate to propose for subordinate-lien transactions in Sec.
1026.43(e)(2)(vi).
To develop the proposed thresholds for subordinate-lien
transactions in Sec. 1026.43(e)(2)(vi)(D) and (E), the Bureau
considered evidence related to credit characteristics and loan
performance for subordinate-lien transactions at various rate spreads
and loan amounts (adjusted for inflation) using HMDA and Y-14M data, as
shown in Table 10.
Table 10--Loan Characteristics and Performance for Different Sizes of Subordinate-Lien Transactions at Various
Rate Spreads
----------------------------------------------------------------------------------------------------------------
Percent
observed 90+
Rate spread days
range Mean credit delinquent
Loan size group (percentage Mean CLTV, Mean DTI, 2018 score, 2018 within first
points over 2018 HMDA HMDA HMDA 2 years, 2013-
APOR) 2016 Y-14M
data (subset)
----------------------------------------------------------------------------------------------------------------
Under $65,939................. 2.0-2.5......... 76.9 36.1 728 2.1%
Under $65,939................. 2.0-3.0......... 78.4 36.5 724 1.6%
Under $65,939................. 2.0-3.5......... 79.7 36.8 721 1.4%
Under $65,939................. 2.0-4.0......... 80.1 36.9 720 1.4%
Under $65,939................. 2.0-4.5......... 80.2 36.9 719 1.3%
Under $65,939................. 2.0-5.0......... 80.3 37.0 718 1.3%
Under $65,939................. 2.0-5.5......... 80.3 37.1 718 1.3%
Under $65,939................. 2.0-6.0......... 80.3 37.1 717 1.3%
Under $65,939................. 2.0-6.5......... 80.4 37.2 717 1.3%
Under $65,939................. 2.0 and above... 80.7 37.3 715 1.4%
$65,939 and above............. 2.0-2.5......... 79.5 37.2 738 1.9%
$65,939 and above............. 2.0-3.0......... 80.5 37.3 735 1.7%
$65,939 and above............. 2.0-3.5......... 81.0 37.4 732 1.6%
$65,939 and above............. 2.0-4.0......... 81.3 37.5 732 1.7%
$65,939 and above............. 2.0-4.5......... 81.3 37.6 731 1.7%
$65,939 and above............. 2.0-5.0......... 81.5 37.7 731 1.8%
$65,939 and above............. 2.0-5.5......... 81.6 37.7 730 1.8%
$65,939 and above............. 2.0-6.0......... 81.6 37.8 729 1.8%
$65,939 and above............. 2.0-6.5......... 81.7 37.9 729 1.8%
$65,939 and above............. 2.0 and above... 81.8 37.9 728 1.9%
----------------------------------------------------------------------------------------------------------------
In general, the Bureau's analysis found strong credit
characteristics and loan performance for subordinate-lien loans at
various thresholds above two percentage points above APOR. The current
data do not appear to indicate a particular threshold at which the
credit characteristics or loan performance decline significantly.
With respect to larger subordinate-lien transactions, the Bureau's
analysis of 2018 HMDA data on subordinate-lien conventional loans found
that, for consumers with subordinate-lien transactions greater than or
equal to $65,939 that were priced 2 to 3.5 percentage points above
APOR, the mean DTI ratio was 37.4 percent, the mean combined LTV was 81
percent, and the mean credit score was 732. The Bureau also analyzed Y-
14M loan data for 2013 to 2016 and estimated that subordinate-lien
transactions greater than or equal to $65,939 that were priced 2 to 3.5
percentage points above APOR had an early delinquency rate of
[[Page 41761]]
approximately 1.6 percent.\273\ These factors appear to provide a
strong indication of ability to repay, so the Bureau preliminarily
concludes that it may be appropriate to set the threshold at 3.5
percentage points above APOR for subordinate-lien transactions to be
eligible for QM status under Sec. 1026.43(e)(2). The Bureau recognizes
that, because the proposed price-based approach would leave the
threshold in Sec. 1026.43(b)(4) for higher-priced QMs at 3.5
percentage points above APOR for subordinate-lien transactions (and
that such transactions that are not higher priced would, therefore,
receive a safe harbor under Sec. 1026.43(e)(1)(i)), this approach, if
adopted, would result in subordinate-lien transactions for amounts over
$65,939 either being a safe harbor QM or not being eligible for QM
status under Sec. 1026.43(e)(2). No such loans would be eligible to be
a rebuttable presumption QM. Nevertheless, the Bureau believes that the
proposed threshold may appropriately balance the relatively strong
credit characteristics and loan performance of these transactions
historically, which is indicative of ability to repay, against the
concern that the supporting data are limited to recent years with
strong economic performance and conservative underwriting.
---------------------------------------------------------------------------
\273\ The loan data were a subset of the supervisory loan-level
data collected as part of the Board's Comprehensive Capital Analysis
and Review, known as Y-14M data. The early delinquency rate measured
the percentage of loans that were 90 or more days late in the first
two years. The Bureau used loans with payments that were 90 or more
days late to measure delinquency, rather than the 60 or more days
used with the data discussed above for first-lien transactions,
because the Y-14M data do not include a measure for payments 60 or
more days late. Data from a small number of creditors were not
included due to incompatible formatting.
---------------------------------------------------------------------------
For smaller subordinate-lien transactions, the Bureau's analysis of
2018 HMDA data on subordinate-lien conventional loans found that for
consumers with subordinate-lien transactions less than $65,939 with
that were priced between 2 and 6.5 percentage points above APOR, the
mean DTI ratio was 37.2 percent, the mean combined LTV was 80.4
percent, and the mean credit score was 717. The Bureau also analyzed Y-
14M loan data for 2013 to 2016 and estimated that subordinate-lien
transactions less than $65,939 that were priced between 2 and 6.5
percentage points above APOR, the early delinquency rate was
approximately 1.3 percent. Based on these relatively strong credit
characteristics and low delinquency rates, the Bureau preliminarily
concludes that it may be appropriate to set the threshold at 6.5
percentage points above APOR for subordinate-lien transactions less
than $65,939 to be eligible for QM status under Sec. 1026.43(e)(2).
The Bureau notes that under this proposal, subordinate-lien
transactions less than $65,939 priced greater than or equal to 3.5 but
less than 6.5 percentage points above APOR would be eligible only for a
rebuttable presumption of compliance under Sec. 1026.43(e)(1)(ii) and
that consumers, therefore, would have the opportunity to rebut the
presumption under Sec. 1026.43(e)(1)(ii)(B).
The Bureau requests comment, including data or other analysis, on
whether the final rule in Sec. 1026.43(e)(2)(vi)(B) through (C) should
include different rate spread thresholds at which smaller loans would
be considered General QM loans, and, if so, what those thresholds
should be. Specifically, the Bureau requests comment on whether the
General QM rate spread threshold for first-lien loans should be higher
or lower than the rate spread ranges set forth in Table 9 for such
loans with loan amounts less than $109,987 and greater than or equal to
$65,939 and for such loans with loan amounts less than $65,939. For
example, the Bureau solicits comments on whether a rate spread
threshold of less than 6.5 percentage points above APOR for loan
amounts less than $65,939 would strike a better balance between ability
to repay and access to credit, in particular with respect to loans for
manufactured housing and loans to minority borrowers. For commenters
suggesting a different rate spread threshold, the Bureau requests
commenters provide data or other analysis that would support providing
General QM status to such loans taking into account concerns regarding
the consumer's ability to repay and adverse effects on access to
credit.
The Bureau also requests comment, including data or other analysis,
on whether the final rule in Sec. 1026.43(e)(2)(vi)(D) through (E)
should include different rate spread thresholds at which subordinate-
lien loans would be considered General QM loans, and, if so, what those
thresholds should be. Specifically, the Bureau requests comment on
whether the General QM rate spread threshold for subordinate-lien loans
should be higher or lower than the rate spread ranges set forth in
Table 10 for such loans with loan amounts greater than or equal to
$65,939 and for such loans with loan amounts less than $65,939. For
example, the Bureau solicits comments on whether a rate spread
threshold of less than 6.5 percentage points above APOR for
subordinate-lien loans with loan amounts less than $65,939 would strike
a better balance between ability to repay and access to credit. For
commenters suggesting a different rate spread threshold, the Bureau
requests commenters provide data or other analysis that would support
providing General QM status to such loans taking into account concerns
regarding the consumer's ability to repay and adverse effects on access
to credit.
The Bureau also requests comment, including data and other
analysis, on whether the rule should include a DTI limit for smaller
loans and subordinate-lien loans; for example, a DTI limit between 45
and 48 percent, instead of a pricing threshold or together with a
pricing threshold, and, if so, what those limits should be. This
includes comment on whether the approach to smaller loans and
subordinate-lien loans should differ from the approach to other loans
if the Bureau adopts one of the alternatives outlined in part V.E
above.
Determining the APR for Certain Loans for which the Interest Rate May
or Will Change
The Bureau is also proposing to revise Sec. 1026.43(e)(2)(vi) to
include a special rule for determining the APR for certain types of
loans for purposes of whether a loan meets the General QM loan
definition under Sec. 1026.43(e)(2). This special rule would apply to
loans for which the interest rate may or will change within the first
five years after the date on which the first regular periodic payment
will be due. For such loans, for purposes of determining whether the
loan is a General QM loan under Sec. 1026.43(e)(2)(vi), the creditor
would be required to determine the APR by treating the maximum interest
rate that may apply during that five-year period as the interest rate
for the full term of the loan.\274\ The special rule in the proposed
revisions to Sec. 1026.43(e)(2)(vi) would not modify other provisions
in Regulation Z for determining the APR for other purposes, such as the
disclosures addressed in or subject to the commentary to Sec.
1026.17(c)(1).
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\274\ As discussed above in the section-by-section analysis of
proposed Sec. 1026.43(b)(4), an identical special rule for
determining the APR for certain loans for which the interest rate
may or will change also would apply under that paragraph for
purposes of determining whether a QM under Sec. 1026.43(e)(2) is a
higher-priced covered transaction.
---------------------------------------------------------------------------
The Bureau anticipates that the proposed price-based approach to
defining General QM loans would in general be effective in identifying
which loans consumers have the ability to repay and should therefore be
eligible for QM status under Sec. 1026.43(e)(2).
[[Page 41762]]
However, the Bureau is concerned that, absent the special rule, the
proposed price-based approach may less effectively capture specific
unaffordability risks of certain loans for which the interest rate may
or will change relatively soon after consummation. Therefore, for loans
for which the interest rate may or will change within the first five
years after the date on which the first regular periodic payment will
be due, a modified approach to determining the APR for purposes of the
rate-spread thresholds under proposed Sec. 1026.43(e)(2) may be
warranted.
Structure and pricing particular to ARMs. The special rule in
proposed Sec. 1026.43(e)(2)(vi) would apply principally to ARMs with
initial fixed-rate periods of five years or less (referred to herein as
``short-reset ARMs'').\275\ These loans may be affordable for the
initial fixed-rate period but may become unaffordable relatively soon
after consummation if the payments increase appreciably after reset,
causing payment shock. The APR for short-reset ARMs may be less
predictive of ability to repay than for fixed-rate mortgages because of
how ARMs are structured and priced and how the APR for ARMs is
determined under various provisions in Regulation Z. Several different
provisions in Regulation Z address the calculation of the APR for ARMs.
For disclosure purposes, if the initial interest rate is determined by
the index or formula to make later interest rate adjustments,
Regulation Z generally requires the creditor to base the APR disclosure
on the initial interest rate at consummation and to not assume that the
rate will increase during the remainder of the loan.\276\ In some
transactions, including many ARMs, the creditor may set an initial
interest rate that is lower (or less commonly, higher) than the rate
would be if it were determined by the index or formula used to make
later interest rate adjustments. For these ARMs, Regulation Z requires
the creditor to disclose a composite APR based on the initial rate for
as long as it is charged and, for the remainder of the term, on the
fully indexed rate.\277\ The fully indexed rate at consummation is the
sum of the value of the index at the time of consummation plus the
margin, based on the contract. The Dodd-Frank Act requires a different
APR calculation for ARMs for the purpose of determining whether ARMs
are subject to certain HOEPA requirements.\278\ As implemented in Sec.
1026.32(a)(3)(ii), the creditor is required to determine the APR for
HOEPA coverage for transactions in which the interest rate may vary
during the term of the loan in accordance with an index, such as with
an ARM, by using the fully indexed rate or the introductory rate,
whichever is greater.\279\
---------------------------------------------------------------------------
\275\ In addition to short-reset ARMs, the proposed special rule
would apply to step-rate mortgages that have an initial fixed-rate
period of five years or less. The Bureau recognizes that the
interest rates in step-rate mortgages are known at consummation.
However, unlike fixed-rate mortgages and akin to ARMs, the interest
rate of step-rate mortgages changes, thereby raising the concern
that interest-rate increases relatively soon after consummation may
present affordability risks due to higher loan payments. Moreover,
applying the proposed APR determination requirement to such loans is
consistent with the treatment of step-rate mortgages pursuant to the
requirement in the current General QM loan definition to underwrite
loans using the maximum interest rate during the first five years
after the date on which the first regular periodic payment will be
due. See comment 43(e)(2)(iv)-3.iii.
\276\ See comment 17(c)(1)-8.
\277\ See comment 17(c)(1)-10.
\278\ See TILA section 103(bb)(1)(B)(ii).
\279\ See comment 32(a)(3)-3.
---------------------------------------------------------------------------
The requirements in Regulation Z for determining the APR for
disclosure purposes and for HOEPA coverage purposes do not account for
any potential increase or decrease in interest rates based on changes
to the underlying index. If interest rates rise after consummation, and
therefore the value of the index rises to a higher level, the loan can
reset to a higher interest rate than the fully indexed rate at the time
of consummation. The result would be a higher payment than the one
implied by the rates used in determining the APR, and a higher
effective rate spread (and increased likelihood of delinquency) than
the spread that would be taken into account for determining General QM
status at consummation under the price-based approach in the absence of
a special rule.
ARMs may present more risk for consumers than fixed-rate mortgages,
depending on the direction and magnitude of changes in interest rates.
In the case of a 30-year fixed-rate loan, creditors or mortgage
investors assume both the credit risk and the interest-rate risk (i.e.,
the risk that interest rates rise above the fixed rate the consumer is
obligated to pay), and the price of the loan, which is fully captured
by the APR, reflects both risks. In the case of an ARM, the creditor or
investor is assuming the credit risk of the loan, but the consumer
assumes most of the interest-rate risk, as the interest rate will
adjust along with the market. The extent to which the consumer assumes
the interest-rate risk is established by caps in the note on how high
the interest rate charged to the consumer may rise. To compensate for
the added interest-rate risk assumed by the consumer (as opposed to the
investor), ARMs are generally priced lower--in absolute terms--than a
30-year fixed-rate mortgage with comparable credit risk.\280\ Yet with
rising interest rates, the risks that ARMs could become unaffordable,
and therefore lead to delinquency or default, are more pronounced. As
noted above, the requirements for determining the APR for ARMs in
Regulation Z do not reflect this risk because they do not take into
account potential increases in the interest rate over the term of the
loan based on changes to the underlying index. This APR may therefore
understate the risk that the loan may become unaffordable to the
consumer if interest rates increase.
---------------------------------------------------------------------------
\280\ The lower absolute pricing of ARMs with comparable credit
risk is reflected in the lower ARM APOR, which is typically 50 to
150 basis points lower than the fixed-rate APOR.
---------------------------------------------------------------------------
Unaffordability risk more acute for short-reset ARMs. While all
ARMs run the risk of increases in interest rates and payments over
time, longer-reset ARMs (i.e., ARMs with initial fixed-rate periods of
longer than five years) present a less acute risk of unaffordability
than short-reset ARMs. Longer-reset ARMs permit consumers to take
advantage of lower interest rates for more than five years and thus,
akin to fixed-rate mortgages, provide consumers significant time to pay
off or refinance, or to otherwise adjust to anticipated changes in
payment during that relatively long period while the interest rate is
fixed and before payments may increase.
Short-reset ARMs can also contribute to speculative lending because
they permit creditors to originate loans that could be affordable in
the short term, with the expectation that property values will increase
and thereby permit consumers to refinance before payments may become
unaffordable. Further, creditors can minimize their credit risk on such
ARMs by, for example, requiring lower LTV ratios, as was common in the
run-up to the 2008 financial crisis.\281\ Additionally, creditors may
be more willing to market these ARMs in areas of strong housing-price
appreciation, irrespective of a consumer's ability to absorb the
potentially higher payments after reset, because they may expect that
consumers will have the equity to refinance if necessary.
---------------------------------------------------------------------------
\281\ Bureau analysis of NMDB data shows crisis-era short-reset
ARMs had lower LTVs at consummation relative to comparably priced
fixed-rate loans.
---------------------------------------------------------------------------
[[Page 41763]]
In the Dodd-Frank Act, Congress addressed affordability concerns
specific to short-reset ARMs and their eligibility for QM status by
providing in TILA section 129C(b)(2)(A)(v) that, to receive QM status,
ARMs must be underwritten using the maximum interest rate that may
apply during the first five years.\282\ The ATR/QM Rule implemented
this requirement in Regulation Z at Sec. 1026.43(e)(2)(iv). For many
short-reset ARMs, this requirement resulted in a higher DTI that would
have to be compared to the Rule's 43 percent DTI limit to determine
whether the loans were eligible to receive General QM status.
Particularly in a higher-rate environment in which short-reset ARMs
could become more attractive, the five-year maximum interest-rate
requirement combined with the Rule's 43 percent DTI limit would have
likely prevented some of the riskiest short-reset ARMs (i.e., those
that adjust sharply upward in the first five years and cause payment
shock) from obtaining General QM status. As discussed above, the
proposed price-based approach would remove the DTI limit from the
General QM loan definition in Sec. 1026.43(e)(2)(vi). As a result, the
Bureau is concerned that, without the special rule, a price-based
approach may not adequately address the risk that consumers taking out
short-reset ARMs may not have the ability to repay those loans but that
such loans would nonetheless be eligible for General QM status under
Sec. 1026.43(e)(2).\283\
---------------------------------------------------------------------------
\282\ This approach for ARMs is different from the approach in
Sec. 1026.43(c)(5) for underwriting ARMs under the ATR
requirements, which, like the APR determination for HOEPA coverage
for ARMs under Sec. 1026.32(a)(3), is based on the greater of the
fully indexed rate or the initial rate.
\283\ As discussed, the Bureau proposes to exercise its
adjustment and revision authorities to amend Sec. 1026.43(e)(2)(vi)
to provide that, to determine the APR for short-reset ARMs for
purposes of General QM status, the creditor must treat the maximum
interest rate that may apply during that five-year period as the
interest rate for the full term of the loan. The Bureau observes
that the requirement in TILA section 129C(b)(2)(A)(v) to underwrite
ARMs for QM purposes using the maximum interest rate that may apply
during the first five years is at least ambiguous with respect to
whether it independently obligates the creditor to determine the APR
for short-reset ARMs in the same manner as the proposed special
rule, at least where the Bureau relies on pricing thresholds as the
primary indicator of likely repayment ability in the proposed
General QM loan definition. Furthermore, the Bureau tentatively
concludes that it would be reasonable, in light of the proposed
definition of a General QM loan and in light of the policy concerns
already described, to construe TILA section 129C(b)(2)(A)(v) as
imposing the same obligations as the proposed special rule in Sec.
1026.43(e)(2)(vi). Thus, in addition to relying on its adjustment
and revision authorities to amend Sec. 1026.43(e)(2)(vi), the
Bureau tentatively concludes that it may do so under its general
authority to interpret TILA in the course of prescribing regulations
under TILA section 105(a) to carry out the purposes of TILA.
---------------------------------------------------------------------------
How the price-based approach would address affordability concerns.
Bureau analysis of historical ARM pricing and performance indicates
that the General QM product restrictions combined with the proposed
price-based approach would have effectively excluded many--but not
all--of the riskiest short-reset ARMs from obtaining General QM status.
As a result, the Bureau believes an additional mechanism may be merited
to exclude from the General QM loan definition any short-reset ARMs for
which the pricing and structure indicate a risk of delinquency that is
inconsistent with the presumption of compliance with ATR that comes
with QM status.
Bureau analysis of NMDB data shows that short-reset ARMs originated
from 2002 through 2008 had, on average, substantially higher early
delinquency rates (14.9 percent) than other ARMs (10.1 percent) or
fixed-rate mortgages (5.4 percent). Many of these short-reset ARMs were
also substantially higher-priced relative to APOR and more likely to
have product features that TILA and the Rule now prohibits for QMs,
such as interest-only payments or negative amortization. When
considering only loans without such restricted features and with rate
spreads within 2 percentage points of APOR, short-reset ARMs still have
the highest average early delinquency rate (5.5 percent), but the
difference relative to other ARMs (4.3 percent) and fixed-rate
mortgages (4.2 percent) is smaller. Many ARMs in the data during this
period do not report the time between consummation and the first
interest-rate reset, and so are excluded from this analysis.
While the data indicates that short-reset ARMs pose a greater risk
of early delinquency than other ARMs and fixed-rate mortgages, the
Bureau requests additional data or evidence comparing loan performance
of short-reset ARMs, other ARMs, and fixed-rate mortgages. Moreover, as
discussed above, the proposed special rule is designed to address the
risk that, for consumers with short-reset ARMs, a rising-rate
environment can lead to significantly higher payments and delinquencies
in the first five years of the loan term. Therefore, the Bureau also
requests data comparing the performance of such loans during periods of
rising interest rates. The Bureau recognizes that rising rates may pose
some risk of unaffordability for longer-reset ARMs later in the loan
term. However, as discussed above, the Bureau is proposing the special
rule to address the specific concern that short-reset ARMs pose a
higher risk vis-a-vis other ARMs of becoming unaffordable in the first
five years, before consumers have sufficient time to refinance or
adjust to the larger payments--a concern Congress also identified in
the Dodd-Frank Act.
During the peak of the mid-2000s housing boom, ARMs accounted for
as much as 52 percent of all new originations. In contrast, the current
market share of ARMs is relatively small. Post-crisis, the ARM share
had declined to 12 percent by December 2013 and to 2 percent by
November 2019, only slightly above the historical low of 1 percent in
2009.\284\ A number of factors contributed to the overall decline in
ARM volume, particularly the low-interest-rate environment since the
end of the financial crisis. Typically, ARMs are more popular when
conventional interest rates are high, since the rate (and monthly
payment) during the initial fixed period is typically lower than the
rate of a comparable conventional fixed-rate mortgage.
---------------------------------------------------------------------------
\284\ Laurie Goodman et. al., Urban Inst., Housing Finance at a
Glance (Feb. 2020), at 9, https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-february-2020/view/full_report.
---------------------------------------------------------------------------
Consistent with TILA section 129C(b)(2)(A), the January 2013 Final
Rule prohibited ARMs with higher-risk features such as interest-only
payments or negative amortization from receiving General QM status.
According to the Assessment Report, short-reset ARMs comprised 17
percent of ARMs in 2012, prior to the January 2013 Final Rule, and fell
to 12.3 percent in 2015, after the effective date of the Rule.\285\ The
Assessment Report also found that short-reset ARMs originated after the
effective date of the Rule were restricted to highly creditworthy
borrowers.\286\
---------------------------------------------------------------------------
\285\ Assessment Report, supra note 58, at 94 (fig. 25).
\286\ Id. at 93-95.
---------------------------------------------------------------------------
This combination of factors post-crisis--the sharp drop in ARM
originations and the restriction of such originations to highly
creditworthy borrowers, as well as the prevalence of low interest
rates--likely has muted the overall risks of short-reset ARMs. For
example, the Assessment Report found that conventional, non-GSE short-
reset ARMs originated after the effective date of the Rule had early
delinquency rates of only 0.2 percent.\287\ Thus, these recent
originations may not accurately reflect the potential unaffordability
of short-reset ARMs under different market
[[Page 41764]]
conditions than those that currently prevail.
---------------------------------------------------------------------------
\287\ Id. at 95 (fig. 26).
---------------------------------------------------------------------------
Proposed special rule for APR determination for short-reset
ARMs.\288\ Given the potential that rising interest rates could cause
short-reset ARMs to become unaffordable for consumers following
consummation and the fact that the price-based approach may not account
for some of those risks because of how APRs are determined for ARMs,
the Bureau is proposing a special rule to determine the APR for short-
reset ARMs for purposes of defining General QM under Sec.
1026.43(e)(2). As noted above, in defining QM in TILA, Congress adopted
a special requirement to address affordability concerns for short-reset
ARMs. Specifically, the statute provides that, for an ARM to be a QM,
the underwriting must be based on the maximum interest rate permitted
under the terms of the loan during the first five years. With the 43
percent DTI limit in the current rule, implementing the five-year
underwriting requirement is straightforward: The rule requires a
creditor to calculate DTI using the mortgage payment that results from
the maximum possible interest rate that could apply during the first
five years.\289\ This ensures that the creditor calculates the DTI
using the highest interest rate that the consumer may experience in the
first five years, and the loan is not eligible for QM status under
Sec. 1026.43(e)(2) if the DTI calculated using that interest rate
exceeds 43 percent. The Bureau is concerned that using the fully
indexed rate to determine the APR for purposes of the rate spread
thresholds in proposed Sec. 1026.43(e)(2)(vi) would not provide a
sufficiently meaningful safeguard against the elevated likelihood of
delinquency for short-reset ARMs. For that reason, the Bureau is
proposing the special rule for determining the APR for such loans.
---------------------------------------------------------------------------
\288\ As noted above, the proposed special rule would also apply
to step-rate mortgages in which the interest rate changes in the
first five years.
\289\ 12 CFR 1026.43(e)(2)(iv).
---------------------------------------------------------------------------
The Bureau believes the statutory five-year underwriting
requirement provides a basis for the special rule for determining the
APR for short-reset ARMs for purposes of General QM rate-spread
thresholds under Sec. 1026.43(e)(2). Specifically, the Bureau is
proposing that the creditor must determine the APR by treating the
maximum interest rate that may apply during the first five years, as
described in proposed Sec. 1026.43(e)(2)(vi), as the interest rate for
the full term of the loan. That APR determination would then be
compared to the APOR \290\ to determine General QM status. This
approach would address in a targeted manner the primary concern about
short-reset ARMs--payment shock--by accounting for the risk of
delinquency and default associated with payment increases under these
loans. And it would do so in a manner that is consistent with the five-
year framework embedded in the statutory provision for such ARMs and
implemented in the current rule.
---------------------------------------------------------------------------
\290\ This refers to the standard APOR for ARMs. The proposed
requirement would modify the determination for the APR of ARMs but
would not affect the determination of the APOR. The Bureau notes
that the APOR used for step-rate mortgages would be the ARM APOR
because, as with ARMs, the interest rate in step-rate mortgages
adjusts and is not fixed. Thus, the APOR for fixed-rate mortgages
would be inapt.
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In sum, the proposed special rule is consistent with both the
statutory mandate for short-reset ARMs and the proposed price-based
approach. As discussed above in part V, the rate spread of APR over
APOR is strongly correlated with early delinquency rates. As a result,
such rate spreads may generally serve as an effective proxy for a
consumer's ability to repay. However, the structure and pricing of ARMs
can result in early interest rate increases that are not fully
accounted for in Regulation Z provisions for determining the APR for
ARMs. Such increases would diminish the effectiveness of the rate
spread as a proxy, and lead to heightened risk of early delinquency for
short-reset ARMs relative to other loans with comparable APRs over APOR
rate spreads. The proposed special rule, by requiring creditors to more
fully incorporate this interest-rate risk in determining the APR for
short-reset ARMs, would help ensure that the resulting pricing would
account for that risk for such loans.
The proposed special rule would require that the maximum interest
rate in the first five years be treated as the interest rate for the
full term of the loan to determine the APR. The Bureau is concerned
that a composite APR determination based on the maximum interest rate
in the first five years and the fully indexed rate for the remaining
loan term could understate the APR for short-reset ARMs by failing to
sufficiently account for the risk that consumers with such loans could
face payment shock early in the loan term. Accordingly, to account for
that risk, and due to concerns about whether it would be appropriate to
presume ATR for short-reset ARMs without such a safeguard, the Bureau
is proposing that the APR for short-reset ARMs be based on the maximum
interest rate during the first five years.
The Bureau considered several alternatives to the proposed special
rule for certain loans for which the interest rate may or will change
within the first five years after the date on which the first regular
periodic payment will due. In response to the ANPR, several consumer
advocates submitted comments suggesting prohibiting altogether short-
reset ARMs from consideration as General QMs. These commenters pointed
to the high default and foreclosure rates of such ARMs, the complex
nature of the product, and consumers' insufficient comprehension of the
product as justification to deny General QM status for ARMs with a
fixed-rate period of less than five years. The Bureau believes the
risks associated with short-reset ARMs can be effectively managed
without prohibiting them from receiving General QM status, given that
the Dodd-Frank Act explicitly permits short-reset ARMs to be considered
as General QMs and includes a specific provision for addressing the
potential for payment shock from such loans.
One of the above-referenced commenters alternatively recommended
the Bureau impose specific limits on annual adjustments for short-reset
ARMs. The Bureau considered this and similar alternatives, including
applying a different rate spread over APOR for short-reset ARMs. The
Bureau anticipates that the proposed approach would address in a more
streamlined and targeted manner the core problem, i.e., that short-
reset ARMs could reset to significantly higher interest rates shortly
after consummation resulting in a risk of default from unaffordable
payments not adequately reflected under the standard determination of
APR for ARMs. Further, the Bureau believes that including different
rate spreads or similar schemes for short-reset ARMs and additional
subtypes of loans would impose unnecessary operational and compliance
complexity.
Proposed comment 43(e)(2)(vi)-4.i explains that provisions in
subpart C, including the existing commentary to Sec. 1026.17(c)(1),
address the determination of the APR disclosures for closed-end credit
transactions and that provisions in Sec. 1026.32(a)(3) address how to
determine the APR to determine coverage under Sec. 1026.32(a)(1)(i).
It further explains that proposed Sec. 1026.43(e)(2)(vi) requires, for
the purposes of that paragraph, a different determination of the APR
for a QM under proposed Sec. 1026.43(e)(2) for which the interest rate
may or will change within the first five years after the date on which
the first regular
[[Page 41765]]
periodic payment will be due. In addition, proposed comment
43(e)(2)(vi)-4.i explains that an identical special rule for
determining the APR for such a loan also applies for purposes of
proposed Sec. 1026.43(b)(4).
Proposed comment 43(e)(2)(vi)-4.ii explains the application of the
special rule in proposed Sec. 1026.43(e)(2)(vi) for determining the
APR for a loan for which the interest rate may or will change within
the first five years after the date on which the first regular periodic
payment will be due. Specifically, it explains that the special rule
applies to ARMs that have a fixed-rate period of five years or less and
to step-rate mortgages for which the interest rate changes within that
five-year period.
Proposed comment 43(e)(2)(vi)-4.iii explains that, to determine the
APR for purposes of proposed 43(e)(2)(vi), a creditor must treat the
maximum interest rate that could apply at any time during the five-year
period after the date on which the first regular periodic payment will
be due as the interest rate for the full term of the loan, regardless
of whether the maximum interest rate is reached at the first or
subsequent adjustment during the five-year period. Further, the
proposed comment cross-references existing comments 43(e)(2)(iv)-3 and
-4 for additional instruction on how to determine the maximum interest
rate during the first five years after the date on which the first
regular periodic payment will be due.
Proposed comment 43(e)(2)(vi)-4.iv explains how to use the maximum
interest rate to determine the APR for purposes of proposed Sec.
1026.43(e)(2)(vi). Specifically, the proposed comment explains that the
creditor must determine the APR by treating the maximum interest rate
described in proposed Sec. 1026.43(e)(2)(vi) as the interest rate for
the full term of the loan. It further provides an example of how to
determine the APR by treating the maximum interest rate as the interest
rate for the full term of the loan.
As discussed above in part IV, TILA section 105(a), directs the
Bureau to prescribe regulations to carry out the purposes of TILA, and
provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith. In particular, a
purpose of TILA section 129C, as amended by the Dodd-Frank Act, to
assure that consumers are offered and receive residential mortgage
loans on terms that reasonably reflect their ability to repay the
loans.
As also discussed above in part IV, TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of section 129C, necessary and appropriate
to effectuate the purposes of section 129C and section 129B, to prevent
circumvention or evasion thereof, or to facilitate compliance with such
section.
The Bureau is proposing the special rule in Sec. 1026.43(e)(2)(vi)
regarding the APR determination of certain loans for which the interest
rate may or will change pursuant to its authority under TILA section
105(a) to make such adjustments and exceptions as are necessary and
proper to effectuate the purposes of TILA, including that consumers are
offered and receive residential mortgage loans on terms that reasonably
reflect their ability to repay the loans. The Bureau believes that
these proposed provisions may ensure that General QM status would not
be accorded to short-reset ARMs and certain other loans that pose a
heightened risk of becoming unaffordable relatively soon after
consummation. The Bureau is also proposing these provisions pursuant to
its authority under TILA section 129C(b)(3)(B)(i) to revise and add to
the criteria that define a QM. The Bureau believes that the proposed
APR determination provisions in Sec. 1026.43(e)(2)(vi) may ensure that
responsible, affordable mortgage credit remains available to consumers
in a manner consistent with the purpose of TILA section 129C,
referenced above, as well as effectuate that purpose.
The Bureau requests comment on all aspects of the proposed special
rule in proposed Sec. 1026.43(e)(2)(vi). In particular, the Bureau
requests data regarding short-reset ARMs and those step-rate mortgages
that would be subject to the proposed special rule, including default
and delinquency rates and the relationship of those rates to price. The
Bureau also requests comment on alternative approaches for such loans,
including the ones discussed above, such as imposing specific limits on
annual rate adjustments for short-reset ARMs, applying a different rate
spread, and excluding such loans from General QM eligibility
altogether.
43(e)(4)
TILA section 129C(b)(3)(B)(ii) directs HUD, VA, USDA, and the Rural
Housing Service (RHS) to prescribe rules defining the types of loans
they insure, guarantee, or administer, as the case may be, that are
QMs. Pending the other agencies' implementation of this provision, the
Bureau included in the ATR/QM Rule a temporary category of QM loans in
the special rules in Sec. 1026.43(e)(4)(ii)(B) through (E) consisting
of mortgages eligible to be insured or guaranteed (as applicable) by
HUD, VA, USDA, and RHS. The Bureau also created the Temporary GSE QM
loan definition, in Sec. 1026.43(e)(4)(ii)(A).
Section 1026.43(e)(4)(i) states that, notwithstanding Sec.
1026.43(e)(2), a QM is a covered transaction that satisfies the
requirements of Sec. 1026.43(e)(2)(i) through (iii)--the General QM
loan-feature prohibitions and points-and-fees limits--as well as one or
more of the criteria in Sec. 1026.43(e)(4)(ii). Section
1026.43(e)(4)(ii) states that a QM under Sec. 1026.43(e)(4) must be a
loan that is eligible under enumerated ``special rules'' to be (A)
purchased or guaranteed by the GSEs while under the conservatorship of
the FHFA (the Temporary GSE QM loan definition), (B) insured by HUD
under the National Housing Act, (C) guaranteed by VA, (D) guaranteed by
USDA pursuant to 42 U.S.C. 1472(h), or (E) insured by RHS. Section
1026.43(e)(4)(iii)(A) states that Sec. 1026.43(e)(4)(ii)(B) through
(E) shall expire on the effective date of a rule issued by each
respective agency pursuant to its authority under TILA section
129C(b)(3)(ii) to define a QM. Section 1026.43(e)(4)(iii)(B) states
that, unless otherwise expired under Sec. 1026.43(e)(4)(iii)(A), the
special rules in Sec. 1026.43(e)(4) are available only for covered
transactions consummated on or before January 10, 2021.
The Bureau proposes to amend Sec. 1026.43(e)(4) to state that,
notwithstanding Sec. 1026.43(e)(2), a QM is a covered transaction that
is defined as a QM by HUD under 24 CFR 201.7 or 24 CFR 203.19, VA under
38 CFR 36.4300 or 38 CFR 36.4500, or USDA under 7 CFR 3555.109. There
are two reasons for this proposed amendment.
First, if the Bureau issues a final rule in connection with this
present proposal, the Bureau anticipates that the Temporary GSE QM loan
definition described in Sec. 1026.43(e)(4)(ii)(A) may expire upon the
effective date of such a final rule. This is because, in a separate
proposed rule released simultaneously with this proposal, the Bureau
proposes
[[Page 41766]]
to revise Sec. 1026.43(e)(4)(iii)(B) to state that, unless otherwise
expired under Sec. 1026.43(e)(4)(iii)(A), the special rules in Sec.
1026.43(e)(4) are available only for covered transactions consummated
on or before the effective date of a final rule issued by the Bureau
amending the General QM loan definition. The Bureau may issue a final
rule concerning its proposal to extend the sunset date in Sec.
1026.43(e)(4)(iii)(B) before it issues a final rule concerning this
present proposal (which would amend the General QM loan definition).
Thus, if the Bureau issues a final rule in connection with this present
proposal, such a final rule would remove the Temporary GSE QM loan
definition from Sec. 1026.43(e)(4)(ii)(A).
Second, after promulgation of the January 2013 Final Rule, each of
the agencies described in Sec. 1026.43(e)(4)(ii)(B) through (E)
adopted separate definitions of qualified mortgages.\291\ Under current
Sec. 1026.43(e)(4)(iii)(A), the special rules in Sec.
1026.43(e)(4)(ii)(B) through (E) are already superseded by the actions
of HUD, VA, and USDA. The Bureau proposes to amend Sec. 1026.43(e)(4)
to provide cross-references to each of these other agencies'
definitions so that creditors and practitioners have a single point of
reference for all QM definitions.
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\291\ 78 FR 75215 (Dec. 11, 2013) (HUD); 79 FR 26620 (May 9,
2014) and 83 FR 50506 (Oct. 9, 2018) (VA); and 81 FR 26461 (May 3,
2016) (USDA).
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The Bureau also proposes to amend comment 43(e)(4)-1 to reflect the
cross-references to the QM definitions of other agencies and to clarify
that a covered transaction that meets another agency's definition is a
QM for purposes of Sec. 1026.43(e). Comment 43(e)(4)-2 would be
amended to clarify that covered transactions that met the requirements
of Sec. 1026.43(e)(2)(i) through (iii), were eligible for purchase or
guarantee by Fannie Mae or Freddie Mac, and were consummated prior to
the effective date of any final rule promulgated as a result of the
proposal would still be considered a QM for purposes of Sec.
1026.43(e) after the adoption of such potential final rule. Comments
43(e)(4)-3, -4, and -5 would be amended to indicate that such comments
are reserved for future use. The Bureau requests comment on the
proposed amendments to Sec. 1026.43(e)(4) and related commentary.
Conforming Changes
As discussed above, the Bureau is proposing revisions to Sec.
1026.43(e)(2)(v) and (e)(2)(vi) that would, among other things, remove
references to appendix Q and remove the DTI ratio limit in Sec.
1026.43(e)(2)(vi). The Bureau is also proposing to remove appendix Q.
Accordingly, the Bureau is proposing nonsubstantive conforming changes
in certain provisions to reflect the proposed changes to Sec.
1026.43(e)(2)(v) and (e)(2)(vi) and the proposed removal of appendix Q.
Specifically, the Bureau proposes to update comment 43(c)(7)-1 by
removing the reference to the DTI limit in Sec. 1026.43(e). The Bureau
also proposes conforming changes to provisions related to small
creditor QMs in Sec. 1026.43(e)(5)(i) and to balloon-payment QMs in
Sec. 1026.43(f)(1). Both Sec. 1026.43(e)(5) and (f)(1) provide that
as part of the respective QM definitions, loans must comply with the
requirements to consider and verify debts and income in existing Sec.
1026.43(e)(2)(v). As discussed above, the Bureau is proposing to
reorganize and revise Sec. 1026.43(e)(2)(v) in order to provide that
creditors must consider DTI or residual income and to clarify the
requirements for creditors to consider and verify income, debt and
other information. The proposed conforming changes to Sec.
1026.43(e)(5) and (f)(1) would generally insert the substantive
requirements of existing Sec. 1026.43(e)(2)(v) into Sec.
1026.43(e)(5)(i) and (f)(1), respectively, and would provide that loans
under Sec. 1026.43(e)(5) and Sec. 1026.43(f) do not have to comply
with proposed Sec. 1026.43(e)(2)(v) or (e)(2)(vi). The proposed
conforming changes would not insert the requirement that lenders
consider and verify income, debt, and other information in accordance
with appendix Q because, as described elsewhere in this proposal, the
Bureau is proposing to remove appendix Q from Regulation Z. The Bureau
is also proposing conforming changes to the related commentary.
Appendix Q to Part 1026--Standards for Determining Monthly Debt and
Income
Appendix Q to part 1026 contains standards for calculating and
verifying debt and income for purposes of determining whether a
mortgage satisfies the 43 percent DTI limit for General QM loans. As
explained in the section-by-section analysis of Sec.
1026.43(e)(2)(v)(B) above, the Bureau proposes to remove appendix Q
entirely in light of concerns from creditors and investors that its
perceived rigidity, ambiguity, and static nature result in standards
that are both confusing and outdated. As noted above, the Bureau seeks
comment on its proposal to remove appendix Q entirely and not to retain
it as an option for creditors to verify the consumer's income, assets,
debt obligations, alimony, and child support.
VII. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
As discussed above, this proposal would amend the General QM loan
definition to, among other things, remove the specific DTI limit and
add a pricing threshold. In developing this proposal, the Bureau has
considered the potential benefits, costs, and impacts as required by
section 1022(b)(2)(A) of the Dodd-Frank Act. Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act requires the Bureau to consider the
potential benefits and costs of a regulation to consumers and covered
persons, including the potential reduction of access by consumers to
consumer financial products or services, the impact on depository
institutions and credit unions with $10 billion or less in total assets
as described in section 1026 of the Dodd-Frank Act, and the impact on
consumers in rural areas. The Bureau consulted with appropriate
prudential regulators and other Federal agencies regarding the
consistency of the proposed rule with prudential, market, or systemic
objectives administered by such agencies as required by section
1022(b)(2)(B) of the Dodd-Frank Act. The Bureau requests comment on the
preliminary analysis presented below as well as submissions of
additional data that could inform the Bureau's analysis of the
benefits, costs, and impacts.
1. Data and Evidence
The discussion in these impact analyses relies on data from a range
of sources. These include data collected or developed by the Bureau,
including HMDA \292\ and NMDB \293\ data, as well
[[Page 41767]]
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 proposed rule,
including the extent to which DTI ratios are probative of a consumer's
ability to repay, the effect of rebuttable presumption status relative
to safe harbor status on access to credit, and the effect of QM status
relative to non-QM status on access to credit. Consultations with other
regulatory agencies, industry, and research organizations inform the
Bureau's impact analyses.
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\292\ 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/.
\293\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a five 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. However, it would be useful to supplement
these data with more information relevant to pricing and APR
calculations (particularly PMI costs) for originations before 2018. PMI
costs are an important component of APRs, particularly for loans with
smaller down payments, and thus should be included or estimated in
calculations of rate spreads relative to APOR. The Bureau seeks
additional information or data which could inform quantitative
estimates of PMI costs or APRs for these loans.
The data also do not provide information on creditor costs. As a
result, analyses of any impacts of the proposal on creditor costs,
particularly realized costs of complying with underwriting criteria or
potential costs from legal liability, are based on more qualitative
information. Similarly, estimates of any changes in burden on consumers
resulting from increased or decreased verification requirements are
based on qualitative information.
The Bureau seeks additional information or data which could inform
quantitative estimates of the number of borrowers whose documentation
cannot satisfy appendix Q, or the costs to borrowers or covered persons
of complying with appendix Q verification requirements (or the
potential costs of complying with appendix Q for Temporary GSE QM
loans) or the proposed verification requirements. The Bureau also seeks
comment or additional information which could inform quantitative
estimates of the availability, underwriting, and pricing of non-QM
alternatives to loans made under the Temporary GSE QM loan definition.
2. Description of the Baseline
The Bureau considers the benefits, costs, and impacts of the
proposal against the baseline in which the Bureau takes no action and
the Temporary GSE QM loan definition expires on January 10, 2021, or
when the GSEs exit conservatorship, whichever occurs first. Under the
proposal, the amendments to the General QM loan definition would take
effect either at the time or after the Temporary GSE QM loan definition
expires, depending on whether the GSEs remain in conservatorship on the
effective date of a final rule issued by the Bureau amending the
General QM loan definition. As a result, the proposal's direct market
impacts are considered relative to a baseline in which the Temporary
GSE QM has expired and no changes have been made to the General QM loan
definition. Unless described otherwise, estimated loan counts under the
baseline, proposal, and alternatives are annual estimates.
Under the baseline, conventional loans could receive QM status
under the Bureau's rules only by underwriting according to the General
QM requirements, Small Creditor QM requirements, Balloon Payment QM
requirements, or the expanded portfolio QM amendments created by the
2018 Economic Growth, Regulatory Relief, and Consumer Protection Act.
The General QM loan definition, which would be the only type of QM
available to larger creditors for conventional loans, requires that
consumers' DTI ratio not exceed 43 percent and requires creditors to
determine debt and income in accordance with the standards in appendix
Q.
The Bureau anticipates that there are two main types of
conventional loans that would be affected by the expiration of the
Temporary GSE QM loan definition: High-DTI GSE loans (those with DTI
ratios above 43 percent) and GSE-eligible loans without appendix Q-
required documentation. These loans are currently originated as QM
loans due to the Temporary GSE QM loan definition but may not be
originated as General QM loans, or may not be originated at all,
without the proposed amendments to the General QM loan definition. This
section 1022 analysis refers to these loans as potentially displaced
loans.
High-DTI GSE Loans. The ANPR provided an estimate of the number of
loans potentially affected by the expiration of the Temporary GSE QM
loan definition.\294\ In providing the estimate, the ANPR focused on
loans that fall within the Temporary GSE QM loan definition but not the
General QM loan definition because they have a DTI ratio above 43
percent. This proposal refers to these loans as High-DTI GSE loans.
Based on NMDB data, the Bureau estimated that there were approximately
6.01 million closed-end first-lien residential mortgage originations in
the United States in 2018.\295\ Based on supplemental data provided by
the FHFA, the Bureau estimated that the GSEs purchased or guaranteed 52
percent--roughly 3.12 million--of those loans.\296\ Of those 3.12
million loans, the Bureau estimated that 31 percent--approximately
957,000 loans--had DTI ratios greater than 43 percent.\297\ Thus, the
Bureau estimated that, as a result of the General QM loan definition's
43 percent DTI limit, approximately 957,000 loans--16 percent of all
closed-end first-lien residential mortgage originations in 2018--were
High-DTI GSE loans.\298\ This estimate does not include Temporary GSE
QM loans that were eligible for purchase by the GSEs but were not sold
to the GSEs.
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\294\ 84 FR 37155, 37158-59 (July 31, 2019).
\295\ 84 FR at 37158-59.
\296\ Id. at 37159.
\297\ Id. The Bureau estimates that 616,000 of these loans were
for home purchases, and 341,000 were refinance loans. In addition,
the Bureau estimates that the share of these loans with DTI ratios
over 45 percent has varied over time due to changes in market
conditions and GSE underwriting standards, rising from 47 percent in
2016 to 56 percent in 2017, and further to 69 percent in 2018.
\298\ Id. at 37159.
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Loans Without Appendix Q-Required Documentation That Are Otherwise
GSE-Eligible. In addition to High-DTI GSE loans, the Bureau noted that
an additional, smaller number of Temporary GSE QM loans with DTI ratios
of 43 percent or less, when calculated using GSE underwriting guides,
may not fall within the General QM loan definition because their method
of verifying income or debt is incompatible with appendix Q.\299\ These
loans would also likely be affected when the Temporary GSE QM loan
definition expires. The Bureau understands, from extensive public
feedback and its own experience, that appendix Q does not specifically
address whether and how to verify certain forms of income. The Bureau
understands these concerns are particularly acute for self-employed
consumers, consumers with part-time employment, and consumers with
[[Page 41768]]
irregular or unusual income streams.\300\ As a result, these consumers'
access to credit may be affected if the Temporary GSE QM loan
definition were to expire without amendments to the General QM loan
definition.
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\299\ Id. at 37159 n.58. Where these types of loans have DTI
ratios above 43 percent, they would be captured in the estimate
above relating to High-DTI GSE loans.
\300\ For example, in qualitative responses to the Bureau's
Lender Survey conducted as part of the Assessment, underwriting for
self-employed borrowers was one of the most frequently reported
sources of difficulty in originating mortgages using appendix Q.
These concerns were also raised in comments submitted in response to
the Assessment RFI, noting that appendix Q is ambiguous with respect
to how to treat income for consumers who are self-employed, have
irregular income, or want to use asset depletion as income. See
Assessment Report, supra note 58, at 200.
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The Bureau's analysis of the market under the baseline focuses on
High-DTI GSE loans because the Bureau estimates that most potentially
displaced loans are High-DTI GSE loans. The Bureau also lacks the loan-
level documentation and underwriting data necessary to estimate with
precision the number of potentially displaced loans that do not fall
within the other General QM loan requirements and are not High-DTI GSE
loans. However, the Assessment did not find evidence of substantial
numbers of loans in the non-GSE-eligible jumbo market being displaced
when appendix Q verification requirements became effective in
2014.\301\ Further, the Assessment Report found evidence of only a
limited reduction in the approval rate of self-employed applicants for
non-GSE eligible mortgages.\302\ Based on this evidence, along with
qualitative comparisons of GSE and appendix Q verification requirements
and available data on the prevalence of borrowers with non-traditional
or difficult-to-document income (e.g., self-employed borrowers, retired
borrowers, those with irregular income streams), the Bureau estimates
this second category of potentially displaced loans is considerably
less numerous than the category of High-DTI GSE loans.
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\301\ Id. at 107 (``For context, total jumbo purchase
originations increased from an estimated 108,700 to 130,200 between
2013 and 2014, based on nationally representative NMDB data.'').
\302\ Id. at 118 (``The Application Data indicates that,
notwithstanding concerns that have been expressed about the
challenge of documenting and verifying income for self-employed
borrowers under the General QM standard and the documentation
requirements contained in appendix Q to the Rule, approval rates for
non-High DTI, non-GSE eligible self-employed borrowers have
decreased only slightly, by two percentage points . . . .'').
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Additional Effects on Loans Not Displaced. While the most
significant market effects under the baseline are displaced loans,
loans that continue to be originated as QM loans after the expiration
of the Temporary GSE QM loan definition would also be affected. After
the expiration date, all loans with DTI ratios at or below 43 percent
which are or would have been purchased and guaranteed as GSE loans
under the Temporary GSE QM loan definition--approximately 2.16 million
loans in 2018--and that continue to be originated as General QM loans
after the provision expires would be required to verify income and
debts according to appendix Q, rather than only according to GSE
guidelines. Given the concerns raised about appendix Q's ambiguity and
lack of flexibility, this would likely entail both increased
documentation burden for some consumers as well as increased costs or
time-to-origination for creditors on some loans.\303\
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\303\ See part V.B. for additional discussion of concerns raised
about appendix Q.
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B. Potential Benefits and Costs to Covered Persons and Consumers
1. Benefits to Consumers
The primary benefit to consumers of the proposal is increased
access to credit, largely through the expanded availability of High-DTI
conventional QM loans. Given the large number of consumers who obtain
High-DTI GSE loans rather than available alternatives, including loans
from the private non-QM market and FHA loans, such High-DTI
conventional QM loans may be preferred due to their pricing,
underwriting requirements, or other features. Based on HMDA data, the
Bureau estimates that 943,000 High-DTI conventional loans in 2018 would
fall outside the QM definitions under the baseline, but fall within the
proposal's amended General QM loan definition.\304\ In addition, some
consumers who would have been limited in the amount they could borrow
due to the DTI limit under the baseline would likely be able to obtain
larger mortgages at higher DTI levels.
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\304\ This estimate includes only HMDA loans which have a
reported DTI and rate spread over APOR, and thus may underestimate
the true number of loans gaining QM status under the proposal.
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Under the baseline, a sizeable share of potentially displaced High-
DTI GSE loans may instead be originated as FHA loans. Thus, under the
proposal, any price advantage of GSE or other conventional QM loans
over FHA loans would be a realized benefit to consumers. Based on the
Bureau's analysis of 2018 HMDA data, FHA loans comparable to the loans
received by High-DTI GSE borrowers, based on loan purpose, credit
score, and combined LTV ratio, on average have $3,000 to $5,000 higher
upfront total loan costs at origination. APRs provide an alternative,
annualized measure of costs over the life of a loan. FHA borrowers
typically pay different APRs, which can be higher or lower than APRs
for GSE loans depending on a borrower's credit score and LTV. Borrowers
with credit scores at or above 720 pay an APR 30 to 60 basis points
higher than borrowers of comparable GSE loans, leading to higher
monthly payments over the life of the loan. However, FHA borrowers with
credit scores below 680 and combined LTVs exceeding 85 percent pay an
APR 20 to 40 basis points lower than borrowers of comparable GSE loans,
leading to lower monthly payments over the life of the loan.\305\ For a
loan size of $250,000, these APR differences amount to $2,800 to $5,600
in additional total monthly payments over the first five years of
mortgage payments for borrowers with credit scores above 720, and
$1,900 to $3,800 in reduced total monthly payments over five years for
borrowers with credit scores below 680 and LTVs exceeding 85
percent.\306\ Thus, all FHA borrowers are likely to pay higher costs at
origination, while some pay higher monthly mortgage payments, and
others pay lower monthly mortgage payments. Assuming for comparison
that all 943,000 additional loans falling within the amended General QM
loan definition would be made as FHA loans in the absence of the
proposal, the average of the upfront pricing estimates implies total
savings for consumers of roughly $4 billion per year on upfront
costs.\307\ The total savings or costs over the life of the loan
implied by APR differences would vary substantially across borrowers
depending on credit scores, LTVs, and length of time holding the
mortgage. While this comparison assumed all potentially displaced loans
would be made as FHA loans, higher costs (either upfront or in monthly
payments) are likely to prevent some borrowers from obtaining loans at
all.
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\305\ The Bureau expects consumers could continue to obtain FHA
loans where such loans were cheaper or preferred for other reasons.
\306\ Based on NMDB data, the Bureau estimates that the average
loan amount among High-DTI GSE borrowers in 2018 was $250,000. While
the time to repayment for mortgages varies with economic conditions,
the Bureau estimates that half of mortgages are typically closed or
paid off five to seven years into repayment. Payment comparisons
based on typical 2018 HMDA APRs for GSE loans, 5 percent for
borrowers with credit scores over 720, and 6 percent for borrowers
with credit scores below 680 and LTVs exceeding 85.
\307\ This approximation assumes $4,000 in savings from total
loan costs for all 943,000 consumers. Actual expected savings would
vary substantially based on loan and credit characteristics,
consumer choices, and market conditions.
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In the absence of the proposed amendment to the regulation, some of
these potentially displaced consumers,
[[Page 41769]]
particularly those with higher credit scores and the resources to make
larger down payments, likely would be able to obtain credit in the non-
GSE private market at a cost comparable to or slightly higher than the
costs for GSE loans, but below the cost of an FHA loan. As a result,
the above cost comparisons between GSE and FHA loans provide an
estimated upper bound on pricing benefits to consumers of the proposal.
However, under the baseline, some potentially displaced consumers may
not obtain loans, and thus would experience benefits of credit access
under the proposal. As discussed above, the Assessment Report found
that the January 2013 Final Rule eliminated between 63 and 70 percent
of high-DTI home purchase loans that were not Temporary GSE QM
loans.\308\ The Bureau requests information or data which would inform
quantitative estimates of the number of consumers who may not obtain
loans and the costs to such consumers.
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\308\ See Assessment Report supra note 58, at 10-11, 117, 131-
47.
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The proposal would also benefit those consumers with incomes
difficult to verify using appendix Q to obtain General QM status, as
the proposed General QM amendments would no longer require the use of
appendix Q for verification of income. Under the proposal--as under the
current rule--creditors would be required to verify income and assets
in accordance with Sec. 1026.43(c)(4) and debt obligations, alimony,
and child support in accordance with Sec. 1026.43(c)(3). The proposal
would also state that a creditor complies with the General QM
requirement to verify income, assets, debt obligations, alimony, and
child support where it complies with verification requirements in
standards the Bureau specifies. The greater flexibility of verification
standards allowed under the proposal is likely to reduce effort and
costs for these consumers, and in the most difficult cases in which
consumers' documentation cannot satisfy appendix Q, the proposal may
allow consumers to obtain General QM loans rather than potential FHA or
non-QM alternatives. These consumers--likely including self-employed
borrowers and those with non-traditional forms of income--would likely
benefit from cost savings under the proposal, similar to those for
High-DTI consumers discussed above.
Finally, as noted below under ``Costs to consumers,'' the Bureau
estimates that 28,000 low-DTI conventional loans which are QM under the
baseline would fall outside the amended QM definition under the
proposal, due to exceeding the pricing thresholds in proposed Sec.
1026.43(e)(2)(vi). If consumers of such loans are able to obtain non-QM
loans with the amended General QM loan definition in place, they would
gain the benefit of the ability-to-repay causes of action and defenses
against foreclosure. However, some of these consumers may instead
obtain FHA loans with QM status.
2. Benefits to Covered Persons
The proposal's primary benefit to covered persons, specifically
mortgage creditors, is the expanded profits from originating High-DTI
conventional QM loans. Under the baseline, creditors would be unable to
originate such loans under the Temporary GSE QM loan definition and
would instead have to originate loans with comparable DTI ratios as
FHA, Small Creditor QM, or non-QM loans, or originate at lower DTI
ratios as conventional General QM loans. Creditors' current preference
for originating large numbers of High-DTI Temporary GSE QMs likely
reflects advantages in a combination of costs or guarantee fees
(particularly relative to FHA loans), liquidity (particularly relative
to Small Creditor QM), or litigation and credit risk (particularly
relative to non-QM). Moreover, QM loans--including Temporary GSE QMs--
are exempt from the Dodd-Frank Act risk retention requirement whereby
creditors that securitize mortgage loans are required to retain at
least five percent of the credit risk of the security, which adds
significant cost. As a result, the proposal conveys benefits to
mortgage creditors originating High-DTI conventional QMs on each of
these dimensions.
In addition, for those lower-DTI GSE loans which could satisfy
General QM requirements, creditors may realize cost savings from
underwriting loans using the more flexible verification standards
allowed under the proposal compared with using appendix Q. Under the
proposal, creditors would be required to consider DTI or residual
income in addition to income and debt but would not need to comply with
the appendix Q standards required for General QM loans under the
baseline. For conventional consumers unable to provide documentation
compatible with appendix Q, the proposal may allow such loans to
continue receiving QM status, providing comparable benefits to
creditors as described for High-DTI GSE loans above.
Finally, those creditors whose business models rely most heavily on
originating High-DTI GSE loans would likely see a competitive benefit
from the continued ability to originate such loans as General QMs. This
is effectively a transfer in market share to these creditors from those
who primarily originate FHA or private non-QM loans, who likely would
have gained market share under the baseline.
3. Costs to Consumers
As discussed above, relative to the baseline, the Bureau estimates
that 943,000 additional High-DTI loans could be originated as General
QM loans under the proposal. Some of these loans would have been non-QM
loans (if originated) under the baseline. As a result, the proposal is
likely to increase the number of consumers who become delinquent on QM
loans, meaning an increase in consumers with delinquent loans who do
not have the benefit of the ability-to-repay causes of action and
defenses against foreclosure.
Tables 5 and 6 in part V.C provide historical early delinquency
rates for loans under different combinations of DTI ratio and rate
spread. Under the proposal, conventional loans originated with rate
spreads below 2 percentage points and DTI above 43 percent would newly
fall within the amended General QM loan definition relative to the
baseline. Based on the number and characteristics of 2018 HMDA
originations, the Bureau estimates 8,000 to 59,000 additional General
QM loans annually could become delinquent within two years of
origination, based on the observed early delinquencies from Table 6
(2018) and Table 5 (2002-2008), respectively. Further, consumers who
would have been limited in the amount they could borrow due to the DTI
limit under the baseline may obtain larger mortgages at higher DTI
levels, further increasing the expected number of delinquencies.
However, given that many of these loans may have been originated as FHA
(or other non-General QM) loans under the baseline, the increase in
delinquent loans held by consumers without the ability-to-repay causes
of action and defenses against foreclosure is likely smaller than the
upper bound estimates cited above.
For the estimated 28,000 consumers obtaining low-DTI General QM or
Temporary GSE QM loans priced 2 percentage points or more above APOR
under the baseline, the amended General QM loan definition may restrict
access to conventional QM credit. There are several possible outcomes
for these consumers. Many may instead obtain FHA loans, likely paying
higher total loan costs as discussed in part VII.B.1. Others may be
able to obtain General QM loans priced below 2 percentage points over
APOR due to creditor
[[Page 41770]]
responses to the proposal or obtain loans under the Small Creditor QM
definition. However, some consumers may not be able to obtain a
mortgage at all. The Bureau requests data or evidence that could inform
estimates for the likelihood of these outcomes among consumers with
low-DTI General QM or Temporary GSE QM loans priced 2 percentage points
or more above APOR.
In addition, the proposal could slow the development of the non-QM
market, particularly new mortgage products which may have become
available under the baseline. To the extent that some consumers would
prefer some of these products to conventional QM loans due to pricing,
verification flexibility, or other advantages, the delay of their
development would be a cost to consumers of the proposal.
4. Costs to Covered Persons
For creditors retaining the credit risk of their General QM
mortgages (e.g., portfolio loans and private securitizations), an
increase in High-DTI General QM originations may lead to increased risk
of credit losses. There is reason to believe, however, that on average
the effects on portfolio lenders may be small. Creditors that hold
loans on portfolio have an incentive to verify ability to repay
regardless of liability under the ATR provisions, because they hold the
credit risk. While portfolio lenders (or those who manage the
portfolios) may recognize and respond to this incentive to different
degrees, the proposed rule is likely on average to cause a small
increase in the willingness of these creditors to originate loans with
a greater risk of default and credit losses, such as certain loans with
high DTI ratios. The credit losses to investors in private
securitizations are harder to predict. In general, these losses would
depend on the scrutiny that investors are willing and able to give to
the non-QM loans under the baseline that become QM loans (with high DTI
ratios) under the proposed rule. It is possible, however, that the
reduction in liability under the ATR provisions would lead to
securitizations with more loans that have a greater risk of default and
credit losses.
In addition, creditors would generally no longer be able to
originate low-DTI conventional loans priced 2 percentage points or
higher above APOR as General QMs under the proposal.\309\ Creditors may
be able to originate some of these loans at prices below 2 percentage
points above APOR or as non-QM or other types of QM loans, but in any
of these cases may pay higher costs or receive lower revenues relative
to under the baseline. If creditors are unable to originate such loans
at all, they would see a larger reduction in revenue.
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\309\ The comparable thresholds are 6.5 percentage points over
APOR for loans priced under $65,939 and 3.5 percentage points over
APOR for loans priced under $109,898 but at or above $65,939.
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The proposal also generates what are effectively transfers between
creditors relative to the baseline, reflecting reduced loan origination
volume for creditors who primarily originate FHA or private non-QM
loans and increased origination volume for creditors who primarily
originate conventional QM loans. Business models vary substantially
within market segments, with portfolio lenders and lenders originating
non-QM loans most likely to forgo market share gains possible under the
baseline, while GSE-focused bank and non-bank creditors are likely to
maintain market share that might be lost in the absence of the
proposal.
5. Other Benefits and Costs
The proposal may limit the development of the secondary market for
non-QM mortgage loan securities. Under the baseline, those loans that
do not fit within General QM requirements represent a potential new
market for non-QM securitizations. Thus, the proposal would reduce the
scope of the potential non-QM market, likely lowering profits and
revenues for participants in the private secondary market. This would
effectively be a transfer from these non-QM secondary market
participants to participants in the agency or other QM loan secondary
markets.
6. Alternatives
A potential alternative to the proposed rule is maintaining the
General QM loan definition's DTI limit but at a higher level, for
example, 45 or 50 percent. The Bureau estimates the effects of such
alternatives relative to the proposed rule, assuming no change in
consumer or creditor behavior. For an alternative General QM loan
definition with a DTI limit of 45 percent, the Bureau estimates that
662,000 fewer loans would be General QM due to DTI ratios over 45
percent, while 32,000 additional loans with rate spreads above the
proposed rule's QM pricing thresholds would newly fit within the
General QM loan definition due to DTI ratios at or below 45 percent.
For an alternative DTI limit of 50 percent, the Bureau estimates 48,000
fewer loans would fit within the General QM loan definition due to DTI
ratios over 50 percent, while 41,000 additional loans with rate spreads
above the proposed rule's QM pricing thresholds would newly fit within
the General QM loan definition due to DTI ratios at or below 50
percent.
In addition to these effects on the composition of loans within the
General QM loan definition, the Bureau uses the historical delinquency
rates from Tables 5 and 6 in part V.C to estimate the number of loans
expected to become delinquent within the General QM loan definition
relative to the proposal. The Bureau estimates that under an
alternative DTI limit of 45 percent, 4,000 to 35,000 fewer General QM
loans would become delinquent relative to the proposal, based on
delinquency rates for 2018 and 2002-2008 originations respectively.
Under an alternative DTI limit of 50 percent, the Bureau estimates
approximately 1,000 additional General QM loans would become delinquent
relative to the proposal, due to loans priced 2 percentage points or
more above APOR gaining QM status.
For an alternative DTI limit of 45 percent, these estimates
collectively indicate that substantially fewer loans would fit within
the General QM loan definition relative to the proposal, which would
also reduce the number of General QM loans becoming delinquent. By
contrast, the estimates indicate that an alternative DTI limit of 50
percent would lead to a comparable number of General QM loans relative
to the proposal, both overall and among those that would become
delinquent. However, consumer and creditor responses to such
alternatives, such as reducing loan amounts to lower DTI ratios, could
increase the number of loans that fit within the General QM loan
definition relative to the proposal.
Other potential alternatives to the proposed rule could impose a
DTI limit only for loans above a certain pricing threshold, for example
a DTI limit of 50 percent for loans with rate spreads at or above 1
percentage point.\310\ Such an alternative would function as a hybrid
of the proposal and an alternative which maintains a DTI limit at a
higher level, 50 percent in the case of this example. As a result, the
number of loans fitting
[[Page 41771]]
within the General QM loan definition would generally be between the
Bureau's estimates for the proposal and its estimates for the
corresponding alternative which maintains the higher DTI limit. Thus,
this hybrid approach would bring fewer loans within the General QM loan
definition compared to the proposal but more loans within the General
QM loan definition compared to the alternative DTI limit of 50 percent,
both overall and among loans that would become delinquent.
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\310\ As discussed in part V.E, a similar approach could impose
a DTI limit above a certain pricing threshold and also tailor the
presumption of compliance with the ATR requirement based on DTI. For
example, the rule could provide that (1) for loans with rate spreads
under 1 percentage point, the loan is a safe harbor QM regardless of
the consumer's DTI ratio; (2) for loans with rate spreads at or
above 1 but less than 1.5 percentage points, a loan is a safe harbor
QM if the consumer's DTI ratio does not exceed 50 percent and a
rebuttable presumption QM if the consumer's DTI is above 50 percent;
and (3) if the rate spread is at or above 1.5 but less than 2
percentage points, loans would be rebuttable presumption QM if the
consumer's DTI ratio does not exceed 50 percent and non-QM if the
DTI ratio is above 50 percent.
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C. Potential Impact on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets, as Described in Section 1026
The proposal's expected impact on depository institutions and
credit unions that are also creditors making covered loans (depository
creditors) with $10 billion or less in total assets is similar to the
expected impact on larger depository creditors and on non-depository
creditors. As discussed in part VII.B.4 (Costs to Covered Persons),
depository creditors originating portfolio loans may forgo potential
market share gains that would occur in the absence of the proposal. In
addition, depository creditors with $10 billion or less in total assets
that originate portfolio loans can originate High-DTI Small Creditor QM
loans under the rule. These depository creditors may currently rely
less on the Temporary GSE QM loan definition for originating High-DTI
loans. If the expiration of the Temporary GSE QM loan definition would
confer a competitive advantage to these small creditors in their
origination of High-DTI loans, the proposal would offset this outcome.
Conversely, those small depository creditors that primarily rely on
the GSEs as a secondary market outlet because they do not have the
capacity to hold numerous loans on portfolio or the infrastructure or
scale to securitize loans may continue to benefit from the ability to
make High-DTI GSE loans as QM loans. In the absence of the proposal,
these creditors would be limited to originating GSE loans as QMs only
with DTI at or below 43 percent under the current General QM loan
definition. These creditors may also originate FHA, VA, or USDA loans
or non-QM loans for private securitizations, likely at a higher cost
relative to originating Temporary GSE QM loans. The proposed rule would
allow these creditors to originate more GSE loans under the General QM
loan definition and have a lower cost of origination relative to the
baseline.\311\
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\311\ Alternative approaches, such as retaining a DTI limit of
45 or 50 percent, would have similar effects of allowing small
depository creditors originate more GSE loans under an expanded
General QM loan definition relative to the baseline, while
offsetting potential competitive advantages for small depository
creditors that originate Small Creditor QM loans.
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D. Potential Impact on Rural Areas
The proposal's expected impact on rural areas is similar to the
expected impact on non-rural areas. Based on 2018 HMDA data, the Bureau
estimates that High-DTI conventional purchase mortgages originated for
homes in rural areas are approximately as likely to be reported as
initially sold to the GSEs (52.5 percent) as loans in non-rural areas
(52 percent).\312\ In addition, the Bureau estimates that in 2018, 95.6
percent of conventional purchase loans originated for homes in rural
areas would have been QM loans under the proposal, similar to the
Bureau's estimate for all conventional purchase loans in rural and non-
rural areas (96.1 percent).\313\
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\312\ These statistics are estimated based on originations from
the first nine months of the year, to allow time for loans to be
sold before HMDA reporting deadlines. In addition, a higher share of
High-DTI conventional purchase non-rural loans (33.3 percent) report
being sold to other non-GSE purchasers compared to rural loans (22.3
percent).
\313\ For alternative approaches, the Bureau estimates 84.7
percent of conventional purchase loans for homes in rural areas
would have been QMs under a DTI limit of 45 percent, and 95.7
percent of conventional purchase loans for homes in rural areas
would have been QMs under a DTI limit of 50 percent.
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VIII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires each
agency to consider the potential impact of its regulations on small
entities, including small businesses, small governmental units, and
small not-for-profit organizations. The RFA defines a ``small
business'' as a business that meets the size standard developed by the
Small Business Administration pursuant to the Small Business Act.\314\
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\314\ 5 U.S.C. 601(3) (the Bureau may establish an alternative
definition after consultation with the Small Business Administration
and an opportunity for public comment).
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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).\315\ 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.\316\
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\315\ 5 U.S.C. 603-605.
\316\ 5 U.S.C. 609.
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An IRFA is not required for this proposal because the proposal, if
adopted, would not have a SISNOSE. As the below analysis makes clear,
relative to the baseline, the proposed rule has only one sizeable
adverse effect. Certain loans with DTI ratios under 43 percent that
would otherwise be originated as rebuttable presumption QM loans under
the baseline would be non-QM loans under the proposal. The proposal
would also have a number of more minor effects on small entities which
are not quantified in this analysis, including adjustments to the APR
calculation used for certain ARMs when determining QM status;
amendments to the Rule's requirements to consider and verify income,
assets, debt obligations, alimony, and child support; and the addition
of DTI as a factor consumers may use to rebut the QM presumption of
compliance for loans priced 1.5 percentage points or more over APOR.
The Bureau expects only small increases or decreases in burden from
these more minor effects.
The analysis divides potential originations into different
categories and considers whether the proposed rule has any adverse
impact on originations relative to the baseline. Note that under the
baseline, the category of Temporary GSE QM loans no longer exists. The
Bureau has identified five categories of small entities that may be
subject to the proposed provisions: Commercial banks, savings
institutions and credit unions (NAICS 522110, 522120, and 522130) with
assets at or below $600 million; mortgage brokers (NAICS 522310) with
average annual receipts at or below $8 million; and mortgage companies
(NAICS 522292 and 522298) with average annual receipts at or below
$41.5 million. As discussed further below, the Bureau relies primarily
on 2018 HMDA data for the analysis.\317\
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\317\ Non-depositories are classified as small entities if they
had fewer than 5,188 total originations in 2018. The classification
for non-depositories is based on the SBA small entity definition for
mortgage companies (less than $41.5 million in annual revenues) and
an estimate of $8,000 for revenue-per-origination from the
Assessment Report, supra note 58, at 78. The HMDA data do not
directly distinguish mortgage brokers from mortgage companies, so
the more inclusive revenue threshold is used.
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Type I: First Liens That Are Not Small Loans, DTI Is Over 43 Percent
Under the baseline, small entities cannot originate Type I loans as
safe harbor or rebuttable presumption QM
[[Page 41772]]
loans unless they are also small creditors and comply with the
additional requirements of the small creditor QM category. Neither the
removal of DTI requirements nor the addition of the pricing conditions
have an adverse impact on the ability of small entities to originate
these loans.
Type II: First Liens That Are Not Small Loans, DTI Is 43 Percent or
Under
Under the baseline, small entities can originate these loans as
either safe harbor QM or rebuttable presumption QM, depending on
pricing. The removal of DTI requirements has no adverse impact on the
ability of small entities to originate these loans. The addition of the
pricing conditions has no adverse impact on the ability of small
creditors to originate these loans as safe harbor QM loans: A loan with
APR within 1.5 percentage points of APOR that can be originated as a
safe harbor QM loan under the baseline can be originated as a safe
harbor QM loan under the pricing conditions of the proposed rule.
Similarly, the addition of the pricing conditions has no adverse impact
on the ability of small creditors to originate rebuttable presumption
QM loans with APR between 1.5 percentage points and 2 percentage points
over APOR. The addition of the pricing conditions would, however,
prevent small creditors from originating rebuttable presumption QM
loans with APR 2 percentage points or more over APOR. In the SISNOSE
analysis below, the Bureau conservatively assumes that none of these
loans would be originated.
Type III: First-Liens That Are Small Loans
Under the baseline, small entities can originate these loans as
General QM loans if they have DTI ratios at or below the DTI limit of
43 percent. The proposal's amended General QM loan definition preserves
QM status for some smaller, low-DTI loans priced 2 percentage points or
more over APOR. Specifically, loans under $65,939 with APR less than
6.5 percentage points over APOR and loans under $109,898 with APR less
than 3.5 percentage points over APOR can be originated as General QM
loans, assuming they meet all other General QM requirements. The
proposal would prevent small creditors from originating smaller, low-
DTI loans with APR at or above these higher thresholds as General QM
loans. For the SISNOSE analysis below, the Bureau conservatively
assumes that none of these loans would be originated.
Type IV: Closed-End Subordinate-Liens
Under the baseline, small entities can originate these loans as
General QM loans if they have DTI ratios at or below the DTI limit of
43 percent. The proposal's amended General QM loan definition creates
new pricing thresholds for subordinate-lien originations. Subordinate-
lien loans under $65,939 with APR less than 6.5 percentage points over
APOR and larger subordinate-lien loans with APR less than 3.5
percentage points over APOR can be originated as General QM loans,
assuming they meet all other General QM requirements. The proposal
would prevent small creditors from originating low-DTI, subordinate-
lien loans with APR at or above these thresholds as General QM loans.
For the SISNOSE analysis below, the Bureau conservatively assumes that
none of these loans would be originated.
Analysis
For purposes of this analysis, the Bureau assumes that average
annual receipts for small entities is proportional to mortgage loan
origination volume. The Bureau further assumes that a small entity
experiences a significant negative effect from the proposed rule if the
proposed rule would cause a reduction in origination volume of over 2
percent. Using the 2018 HMDA data, the Bureau estimates that if none of
the Type II, III, or IV loans adversely affected were originated, 149
small entities would experience a loss of over 2 percent in mortgage
loan origination volume. Thus, there are at most 149 small entities
that experience a significant adverse economic impact. The Bureau
estimates that there are 2,027 small entities in the HMDA data. 149 is
not a substantial number relative to 2,027.
The Bureau recognizes that there are small entities that originate
mortgage credit that do not report HMDA data. The Bureau has no reason
to expect, however, that small entities that originate mortgage credit
that do not report HMDA data would be affected differently from small
HMDA reporters by the proposed rule. In other words, the Bureau expects
that including HMDA non-reporters in the analysis would increase the
number of small entities that would experience a loss of over 2 percent
in mortgage loan origination volume and the number of relevant small
entities by the same proportion. Thus, the overall number of small
entities that would experience a significant adverse economic impact
would not be a substantial number of the overall number of small
entities that originate mortgage credit.
Accordingly, the Director certifies that this proposal, if adopted,
would not have a significant economic impact on a substantial number of
small entities. The Bureau requests comment on its analysis of the
impact of the proposal on small entities and requests any relevant
data.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\318\ 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.
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\318\ 44 U.S.C. 3501 et seq.
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The Bureau has determined that this proposal does not contain any
new or substantively revised information collection requirements other
than those previously approved by OMB under OMB control number 3170-
0015. The proposal would amend 12 CFR part 1026 (Regulation Z), which
implements TILA. OMB control number 3170-0015 is the Bureau's OMB
control number for Regulation Z.
The Bureau welcomes comments on these determinations or any other
aspect of the proposal for purposes of the PRA.
X. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Laura Galban, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, 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 proposes to amend
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
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1. The authority citation for part 1026 continues to read as follows:
[[Page 41773]]
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
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2. Amend Sec. 1026.43 by revising paragraphs (b)(4), (e)(2)(v) and
(vi), (e)(4), (e)(5)(i)(A) and (B), and (f)(1)(i) and (iii) to read as
follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
* * * * *
(b) * * *
(4) Higher-priced covered transaction means a covered transaction
with an annual percentage rate that exceeds the average prime offer
rate for a comparable transaction as of the date the interest rate is
set by 1.5 or more percentage points for a first-lien covered
transaction, other than a qualified mortgage under paragraph (e)(5),
(e)(6), or (f) of this section; by 3.5 or more percentage points for a
first-lien covered transaction that is a qualified mortgage under
paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more
percentage points for a subordinate-lien covered transaction. For
purposes of a qualified mortgage under paragraph (e)(2) of this
section, for a loan for which the interest rate may or will change
within the first five years after the date on which the first regular
periodic payment will be due, the creditor must determine the annual
percentage rate for purposes of this paragraph (b)(4) by treating the
maximum interest rate that may apply during that five-year period as
the interest rate for the full term of the loan.
* * * * *
(e) * * *
(2) * * *
(v) For which the creditor, at or before consummation:
(A) Considers the consumer's income or assets, debt obligations,
alimony, child support, and monthly debt-to-income ratio or residual
income, using the amounts determined from paragraph (e)(2)(v)(B) of
this section. For purposes of this paragraph (e)(2)(v)(A), the
consumer's monthly debt-to-income ratio or residual income is
determined in accordance with paragraph (c)(7) of this section, except
that the consumer's monthly payment on the covered transaction,
including the monthly payment for mortgage-related obligations, is
calculated in accordance with paragraph (e)(2)(iv) of this section.
(B)(1) Verifies the consumer's current or reasonably expected
income or assets other than the value of the dwelling (including any
real property attached to the dwelling) that secures the loan using
third-party records that provide reasonably reliable evidence of the
consumer's income or assets, in accordance with paragraph (c)(4) of
this section; and
(2) Verifies the consumer's current debt obligations, alimony, and
child support using reasonably reliable third-party records in
accordance with paragraph (c)(3) of this section.
(vi) For which the annual percentage rate does not exceed the
average prime offer rate for a comparable transaction as of the date
the interest rate is set by the amounts specified in paragraphs
(e)(2)(vi)(A) through (E) of this section. The amounts specified here
shall be adjusted annually on January 1 by the annual percentage change
in the Consumer Price Index for All Urban Consumers (CPI-U) that was
reported on the preceding June 1. For purposes of this paragraph
(e)(2)(vi), the creditor must determine the annual percentage rate for
a loan for which the interest rate may or will change within the first
five years after the date on which the first regular periodic payment
will be due by treating the maximum interest rate that may apply during
that five-year period as the interest rate for the full term of the
loan.
(A) For a first-lien covered transaction with a loan amount greater
than or equal to $109,898 (indexed for inflation), 2 or more percentage
points;
(B) For a first-lien covered transaction with a loan amount greater
than or equal to $65,939 (indexed for inflation) but less than $109,898
(indexed for inflation), 3.5 or more percentage points;
(C) For a first-lien covered transaction with a loan amount less
than $65,939 (indexed for inflation), 6.5 or more percentage points;
(D) For a subordinate-lien covered transaction with a loan amount
greater than or equal to $65,939 (indexed for inflation), 3.5 or more
percentage points;
(E) For a subordinate-lien covered transaction with a loan amount
less than $65,939 (indexed for inflation), 6.5 or more percentage
points.
* * * * *
(4) Qualified mortgage defined--other agencies. Notwithstanding
paragraph (e)(2) of this section, a qualified mortgage is a covered
transaction that is defined as a qualified mortgage by the U.S.
Department of Housing and Urban Development under 24 CFR 201.7 and 24
CFR 203.19, the U.S. Department of Veterans Affairs under 38 CFR
36.4300 and 38 CFR 36.4500, or the U.S. Department of Agriculture under
7 CFR 3555.109.
(5) * * *
(i) * * *
(A) That satisfies the requirements of paragraph (e)(2) of this
section other than the requirements of paragraphs (e)(2)(v) and (vi);
(B) For which the creditor:
(1) Considers and verifies at or before consummation the consumer's
current or reasonably expected income or assets other than the value of
the dwelling (including any real property attached to the dwelling)
that secures the loan, in accordance with paragraphs (c)(2)(i) and
(c)(4) of this section;
(2) Considers and verifies at or before consummation the consumer's
current debt obligations, alimony, and child support in accordance with
paragraphs (c)(2)(vi) and (c)(3) of this section;
(3) Considers at or before consummation the consumer's monthly
debt-to-income ratio or residual income and verifies the debt
obligations and income used to determine that ratio in accordance with
paragraph (c)(7) of this section, except that the calculation of the
payment on the covered transaction for purposes of determining the
consumer's total monthly debt obligations in paragraph (c)(7)(i)(A)
shall be determined in accordance with paragraph (e)(2)(iv) of this
section instead of paragraph (c)(5) of this section;
* * * * *
(f) * * *
(1) * * *
(i) The loan satisfies the requirements for a qualified mortgage in
paragraphs (e)(2)(i)(A) and (e)(2)(ii) and (iii) of this section;
* * * * *
(iii) The creditor:
(A) Considers and verifies at or before consummation the consumer's
current or reasonably expected income or assets other than the value of
the dwelling (including any real property attached to the dwelling)
that secures the loan, in accordance with paragraphs (c)(2)(i) and
(c)(4) of this section;
(B) Considers and verifies at or before consummation the consumer's
current debt obligations, alimony, and child support in accordance with
paragraphs (c)(2)(vi) and (c)(3) of this section;
(C) Considers at or before consummation the consumer's monthly
debt-to-income ratio or residual income and verifies the debt
obligations and income used to determine that ratio in accordance with
paragraph (c)(7) of this section, except that the calculation of the
payment on the covered transaction for purposes of determining the
consumer's total monthly debt obligations in (c)(7)(i)(A) shall be
[[Page 41774]]
determined in accordance with paragraph (f)(1)(iv)(A) of this section,
together with the consumer's monthly payments for all mortgage-related
obligations and excluding the balloon payment;
* * * * *
Appendix Q to Part 1026 [Removed]
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3. Remove Appendix Q to Part 1026.
0
4. In Supplement I to Part 1026--Official Interpretations, under
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling:
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a. Revise 43(b)(4), 43(c)(4), and 43(c)(7);
0
b. Revise Paragraph 43(e)(2)(v);
0
c. Add Paragraphs 43(e)(2)(v)(A) and 43(e)(2)(v)(B) (after Paragraph
43(e)(2)(v));
0
d. Revise Paragraph 43(e)(2)(vi);
0
e. Revise 43(e)(4); and
0
f. Revise Paragraph 43(e)(5), Paragraph 43(f)(1)(i), and e Paragraph
43(f)(1)(iii).
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
* * * * *
43(b)(4) Higher-Priced Covered Transaction
1. Average prime offer rate. The average prime offer rate is
defined in Sec. 1026.35(a)(2). For further explanation of the meaning
of ``average prime offer rate,'' and additional guidance on determining
the average prime offer rate, see comments 35(a)(2)-1 through -4.
2. Comparable transaction. A higher-priced covered transaction is a
consumer credit transaction that is secured by the consumer's dwelling
with an annual percentage rate that exceeds by the specified amount the
average prime offer rate for a comparable transaction as of the date
the interest rate is set. The published tables of average prime offer
rates indicate how to identify a comparable transaction. See comment
35(a)(2)-2.
3. Rate set. A transaction's annual percentage rate is compared to
the average prime offer rate as of the date the transaction's interest
rate is set (or ``locked'') before consummation. Sometimes a creditor
sets the interest rate initially and then re-sets it at a different
level before consummation. The creditor should use the last date the
interest rate is set before consummation.
4. Determining the annual percentage rate for certain loans for
which the interest rate may or will change. Provisions in subpart C of
this part, including the commentary to Sec. 1026.17(c)(1), address how
to determine the annual percentage rate disclosures for closed-end
credit transactions. Provisions in Sec. 1026.32(a)(3) address how to
determine the annual percentage rate to determine coverage under Sec.
1026.32(a)(1)(i). Section 1026.43(b)(4) requires, only for the purposes
of a qualified mortgage under Sec. 1026.43(e)(2), a different
determination of the annual percentage rate for purposes of Sec.
1026.43(b)(4) for a loan for which the interest rate may or will change
within the first five years after the date on which the first regular
periodic payment will be due. See comment 43(e)(2)(vi)-4 for how to
determine the annual percentage rate of such a loan.
* * * * *
43(c)(4) Verification of Income or Assets
1. Income or assets relied on. A creditor need consider, and
therefore need verify, only the income or assets the creditor relies on
to evaluate the consumer's repayment ability. See comment 43(c)(2)(i)-
2. For example, if a consumer's application states that the consumer
earns a salary and is paid an annual bonus and the creditor relies on
only the consumer's salary to evaluate the consumer's repayment
ability, the creditor need verify only the salary. See also comments
43(c)(3)-1 and -2.
2. Multiple applicants. If multiple consumers jointly apply for a
loan and each lists income or assets on the application, the creditor
need verify only the income or assets the creditor relies on in
determining repayment ability. See comment 43(c)(2)(i)-5.
3. Tax-return transcript. Under Sec. 1026.43(c)(4), a creditor may
verify a consumer's income using an Internal Revenue Service (IRS) tax-
return transcript, which summarizes the information in a consumer's
filed tax return, another record that provides reasonably reliable
evidence of the consumer's income, or both. A creditor may obtain a
copy of a tax-return transcript or a filed tax return directly from the
consumer or from a service provider. A creditor need not obtain the
copy directly from the IRS or other taxing authority. See comment
43(c)(3)-2.
4. Unidentified funds. A creditor does not meet the requirements of
Sec. 1026.43(c)(4) if it observes an inflow of funds into the
consumer's account without confirming that the funds are income. For
example, a creditor would not meet the requirements of Sec.
1026.43(c)(4) where it observes an unidentified $5,000 deposit in the
consumer's account but fails to take any measures to confirm or lacks
any basis to conclude that the deposit represents the consumer's
personal income and not, for example, proceeds from the disbursement of
a loan.
* * * * *
43(c)(7) Monthly Debt-to-Income Ratio or Residual Income
1. Monthly debt-to-income ratio or monthly residual income. Under
Sec. 1026.43(c)(2)(vii), the creditor must consider the consumer's
monthly debt-to-income ratio, or the consumer's monthly residual
income, in accordance with the requirements in Sec. 1026.43(c)(7).
Section 1026.43(c) does not prescribe a specific monthly debt-to-income
ratio with which creditors must comply. Instead, an appropriate
threshold for a consumer's monthly debt-to-income ratio or monthly
residual income is for the creditor to determine in making a reasonable
and good faith determination of a consumer's ability to repay.
2. Use of both monthly debt-to-income ratio and monthly residual
income. If a creditor considers the consumer's monthly debt-to-income
ratio, the creditor may also consider the consumer's residual income as
further validation of the assessment made using the consumer's monthly
debt-to-income ratio.
3. Compensating factors. The creditor may consider factors in
addition to the monthly debt-to-income ratio or residual income in
assessing a consumer's repayment ability. For example, the creditor may
reasonably and in good faith determine that a consumer has the ability
to repay despite a higher debt-to-income ratio or lower residual income
in light of the consumer's assets other than the dwelling, including
any real property attached to the dwelling, securing the covered
transaction, such as a savings account. The creditor may also
reasonably and in good faith determine that a consumer has the ability
to repay despite a higher debt-to-income ratio in light of the
consumer's residual income.
* * * * *
Paragraph 43(e)(2)(v)
1. General. For guidance on satisfying Sec. 1026.43(e)(2)(v), a
creditor may rely on commentary to Sec. 1026.43(c)(2)(i) and (vi),
(c)(3), and (c)(4).
Paragraph 43(e)(2)(v)(A)
1. Consider. In order to comply with the requirement to consider
income or assets, debt obligations, alimony, child
[[Page 41775]]
support, and monthly debt-to-income ratio or residual income under
Sec. 1026.43(e)(2)(v)(A), a creditor must take into account income or
assets, debt obligations, alimony, child support, and monthly debt-to-
income ratio or residual income in its ability-to-repay determination.
Under Sec. 1026.25(a), a creditor must retain documentation showing
how it took into account income or assets, debt obligations, alimony,
child support, and monthly debt-to-income ratio or residual income in
its ability-to-repay determination. Examples of such documentation may
include, for example, an underwriter worksheet or a final automated
underwriting system certification, alone or in combination with the
creditor's applicable underwriting standards, that shows how these
required factors were taken into account in the creditor's ability-to-
repay determination.
2. Requirement to consider monthly debt-to-income ratio or residual
income. Section 1026.43(e)(2)(v)(A) does not prescribe specifically how
a creditor must consider monthly debt-to-income ratio or residual
income. Section 1026.43(e)(2)(v)(A) also does not prescribe a
particular monthly debt-to-income ratio or residual income threshold
with which a creditor must comply. A creditor may, for example,
consider monthly debt-to-income ratio or residual income by
establishing monthly debt-to-income or residual income thresholds for
its own underwriting standards and documenting how it applied those
thresholds to determine the consumer's ability to repay. A creditor may
also consider these factors by establishing monthly debt-to-income or
residual income thresholds and exceptions to those thresholds based on
other compensating factors, and documenting application of the
thresholds along with any applicable exceptions.
3. Flexibility to consider additional factors related to a
consumer's ability to repay. The requirement to consider income or
assets, debt obligations, alimony, child support, and monthly debt-to-
income ratio or residual income does not preclude the creditor from
taking into account additional factors that are relevant in determining
a consumer's ability to repay the loan. For guidance on considering
additional factors in determining the consumer's ability to repay, see
comment 43(c)(7)-3.
Paragraph 43(e)(2)(v)(B)
1. Verification of income, assets, debt obligations, alimony, and
child support. Section 1026.43(e)(2)(v)(B) does not prescribe specific
methods of underwriting that creditors must use. Section
1026.43(e)(2)(v)(B)(1) requires a creditor to verify the consumer's
current or reasonably expected income or assets (including any real
property attached to the value of the dwelling) that secures the loan
in accordance with Sec. 1026.43(c)(4), which states that a creditor
must verify such amounts using third-party records that provide
reasonably reliable evidence of the consumer's income or assets.
Section 1026.43(e)(2)(v)(B)(2) requires a creditor to verify the
consumer's current debt obligations, alimony, and child support in
accordance with Sec. 1026.43(c)(3), which states that a creditor must
verify such amounts using reasonably reliable third-party records. So
long as a creditor complies with the provisions of Sec. 1026.43(c)(3)
with respect to debt obligations, alimony, and child support and Sec.
1026.43(c)(4) with respect to income and assets, the creditor is
permitted to use any reasonable verification methods and criteria.
2. Classifying and counting income, assets, debt obligations,
alimony, and child support. ``Current and reasonably expected income or
assets other than the value of the dwelling (including any real
property attached to the dwelling) that secures the loan'' is
determined in accordance with Sec. 1026.43(c)(2)(i) and its
commentary. ``Current debt obligations, alimony, and child support''
has the same meaning as under Sec. 1026.43(c)(2)(vi) and its
commentary. Section 1026.43(c)(2)(i) and (vi) and the associated
commentary apply to a creditor's determination with respect to what
inflows and property it may classify and count as income or assets and
what obligations it must classify and count as debt obligations,
alimony, and child support, pursuant to its compliance with Sec.
1026.43(e)(2)(v)(B).
3. Safe harbor for compliance with specified external standards.
i. Meeting the standards in the following documents for verifying
current or reasonably expected income or assets using third-party
records provides a creditor with reasonably reliable evidence of the
consumer's income or assets. Meeting the standards in the following
documents for verifying current debt obligations, alimony, and child
support obligation using third-party records provides a creditor with
reasonably reliable evidence of the consumer's debt obligations,
alimony, and child support obligations. Accordingly, a creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with
verification standards in one or more of the following documents: [List
to be Determined, as Discussed in Preamble].
ii. Applicable provisions in standards. A creditor complies with
Sec. 1026.43(e)(2)(v)(B) if it complies with requirements in the
standards listed in comment 43(e)(2)(v)(B)-3 for creditors to verify
income, assets, debt obligations, alimony and child support using
specified documents or to include or exclude particular inflows,
property, and obligations as income, assets, debt obligations, alimony,
and child support.
iii. Inapplicable provisions in standards. For purposes of
compliance with Sec. 1026.43(e)(2)(v)(B), a creditor need not comply
with requirements in the standards listed in comment 43(e)(2)(v)(B)-3
other than those that require lenders to verify income, assets, debt
obligations, alimony and child support using specified documents or to
classify and count particular inflows, property, and obligations as
income, assets, debt obligations, alimony, and child support.
iv. Revised versions of standards. A creditor also complies with
Sec. 1026.43(e)(2)(v)(B) where it complies with revised versions of
the standards listed in comment 43(e)(2)(v)(B)-3.i, provided that the
two versions are substantially similar.
v. Use of standards from more than one document. A creditor
complies with Sec. 1026.43(e)(2)(v)(B) if it complies with the
verification standards in one or more of the documents specified in
comment 43(e)(2)(v)(B)-3.i. Accordingly, a creditor may, but need not,
comply with Sec. 1026.43(e)(2)(v)(B) by complying with the
verification standards from more than one document (in other words, by
``mixing and matching'' verification standards).
Paragraph 43(e)(2)(vi)
1. Determining the average prime offer rate for a comparable
transaction as of the date the interest rate is set. For guidance on
determining the average prime offer rate for a comparable transaction
as of the date the interest rate is set, see comments 43(b)(4)-1
through -3.
2. Determination of applicable threshold. A creditor must determine
the applicable threshold by determining which category the loan falls
into based on the face amount of the note (the ``loan amount'' as
defined in Sec. 1026.43(b)(5)). For example, for a first-lien covered
transaction with a loan amount of $75,000, the loan would fall into the
tier for loans greater than or equal to $65,939 (indexed for inflation)
but less than $109,898 (indexed for inflation), for which the
applicable threshold is 3.5 or more percentage points.
[[Page 41776]]
3. Annual adjustment for inflation. The dollar amounts in Sec.
1026.43(e)(2)(vi) will be adjusted annually on January 1 by the annual
percentage change in the CPI-U that was in effect on the preceding June
1. The Bureau will publish adjustments after the June figures become
available each year.
4. Determining the annual percentage rate for certain loans for
which the interest rate may or will change.
i. In general. The commentary to Sec. 1026.17(c)(1) and other
provisions in subpart C address how to determine the annual percentage
rate disclosures for closed-end credit transactions. Provisions in
Sec. 1026.32(a)(3) address how to determine the annual percentage rate
to determine coverage under Sec. 1026.32(a)(1)(i). Section
1026.43(e)(2)(vi) requires, for the purposes of Sec.
1026.43(e)(2)(vi), a different determination of the annual percentage
rate for a qualified mortgage under Sec. 1026.43(e)(2) for which the
interest rate may or will change within the first five years after the
date on which the first regular periodic payment will be due. An
identical special rule for determining the annual percentage rate for
such a loan also applies for purposes of Sec. 1026.43(b)(4).
ii. Loans for which the interest rate may or will change. Section
1026.43(e)(2)(vi) includes a special rule for determining the annual
percentage rate for a loan for which the interest rate may or will
change within the first five years after the date on which the first
regular periodic payment will be due. This rule applies to adjustable-
rate mortgages that have a fixed-rate period of five years or less and
to step-rate mortgages for which the interest rate changes within that
five-year period.
iii. Maximum interest rate during the first five years. For a loan
for which the interest rate may or will change within the first five
years after the date on which the first regular periodic payment will
be due, a creditor must treat the maximum interest rate that could
apply at any time during that five-year period as the interest rate for
the full term of the loan to determine the annual percentage rate for
purposes of Sec. 1026.43(e)(2)(vi), regardless of whether the maximum
interest rate is reached at the first or subsequent adjustment during
the five-year period. For additional instruction on how to determine
the maximum interest rate during the first five years after the date on
which the first regular periodic payment will be due. See comments
43(e)(2)(iv)-3 and -4.
iv. Treatment of the maximum interest rate in determining the
annual percentage rate. For a loan for which the interest rate may or
will change within the first five years after the date on which the
first regular periodic payment will be due, the creditor must determine
the annual percentage rate for purposes of Sec. 1026.43(e)(2)(vi) by
treating the maximum interest rate that may apply within the first five
years as the interest rate for the full term of the loan. For example,
assume an adjustable-rate mortgage with a loan term of 30 years and an
initial discounted rate of 5.0 percent that is fixed for the first
three years. Assume that the maximum interest rate during the first
five years after the date on which the first regular periodic payment
will be due is 7.0 percent. Pursuant to Sec. 1026.43(e)(2)(vi), the
creditor must determine the annual percentage rate based on an interest
rate of 7.0 percent applied for the full 30-year loan term.
* * * * *
43(e)(4) Qualified Mortgage Defined--Other Agencies
1. General. The Department of Housing and Urban Development,
Department of Veterans Affairs, and the Department of Agriculture have
promulgated definitions for qualified mortgages under mortgage programs
they insure, guarantee, or provide under applicable law. Cross-
references to those definitions are listed in Sec. 1026.43(e)(4) to
acknowledge the covered transactions covered by those definitions are
qualified mortgages for purposes of this section.
2. Mortgages originated prior to [effective date of final rule].
Covered transactions that met the requirements of Sec.
1026.43(e)(2)(i) thorough (iii), were eligible for purchase or
guarantee by the Federal National Mortgage Association (Fannie Mae) or
the Federal Home Loan Mortgage Corporation (Freddie Mac) (or any
limited-life regulatory entity succeeding the charter of either)
operating under the conservatorship or receivership of the Federal
Housing Finance Agency pursuant to section 1367 of the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C.
4617), and were consummated prior to [effective date of final rule]
continue to be qualified mortgages for the purposes of this section.
3. [RESERVED].
4. [RESERVED].
5. [RESERVED].
Paragraph 43(e)(5)
1. Satisfaction of qualified mortgage requirements. For a covered
transaction to be a qualified mortgage under Sec. 1026.43(e)(5), the
mortgage must satisfy the requirements for a qualified mortgage under
Sec. 1026.43(e)(2), other than the requirements in Sec.
1026.43(e)(2)(v) and (vi). For example, a qualified mortgage under
Sec. 1026.43(e)(5) may not have a loan term in excess of 30 years
because longer terms are prohibited for qualified mortgages under Sec.
1026.43(e)(2)(ii). Similarly, a qualified mortgage under Sec.
1026.43(e)(5) may not result in a balloon payment because Sec.
1026.43(e)(2)(i)(C) provides that qualified mortgages may not have
balloon payments except as provided under Sec. 1026.43(f). However, a
covered transaction need not comply with Sec. 1026.43(e)(2)(v) and
(vi).
2. Debt-to-income ratio or residual income. Section 1026.43(e)(5)
does not prescribe a specific monthly debt-to-income ratio with which
creditors must comply. Instead, creditors must consider a consumer's
debt-to-income ratio or residual income calculated generally in
accordance with Sec. 1026.43(c)(7) and verify the information used to
calculate the debt-to-income ratio or residual income in accordance
with Sec. 1026.43(c)(3) and (4). However, Sec. 1026.43(c)(7) refers
creditors to Sec. 1026.43(c)(5) for instructions on calculating the
payment on the covered transaction. Section 1026.43(c)(5) requires
creditors to calculate the payment differently than Sec.
1026.43(e)(2)(iv). For purposes of the qualified mortgage definition in
Sec. 1026.43(e)(5), creditors must base their calculation of the
consumer's debt-to-income ratio or residual income on the payment on
the covered transaction calculated according to Sec. 1026.43(e)(2)(iv)
instead of according to Sec. 1026.43(c)(5).
3. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement
that has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A mortgage that will be acquired by a purchaser pursuant
to a forward commitment does not satisfy the requirements of Sec.
1026.43(e)(5), whether the forward commitment provides for the purchase
and sale of the specific transaction or for the purchase and sale of
transactions with certain prescribed criteria that the transaction
meets. However, a forward commitment to another person that also meets
the requirements of Sec. 1026.43(e)(5)(i)(D) is permitted. For
example, assume a creditor that is eligible to make qualified mortgages
under Sec. 1026.43(e)(5) makes a mortgage. If that mortgage meets the
purchase
[[Page 41777]]
criteria of an investor with which the creditor has an agreement to
sell loans after consummation, then the loan does not meet the
definition of a qualified mortgage under Sec. 1026.43(e)(5). However,
if the investor meets the requirements of Sec. 1026.43(e)(5)(i)(D),
the mortgage will be a qualified mortgage if all other applicable
criteria also are satisfied.
4. Creditor qualifications. To be eligible to make qualified
mortgages under Sec. 1026.43(e)(5), a creditor must satisfy the
requirements stated in Sec. 1026.35(b)(2)(iii)(B) and (C). Section
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar
year, or, if the application for the transaction was received before
April 1 of the current calendar year, during either of the two
preceding calendar years, the creditor and its affiliates together
extended no more than 2,000 covered transactions, as defined by Sec.
1026.43(b)(1), secured by first liens, that were sold, assigned, or
otherwise transferred to another person, or that were subject at the
time of consummation to a commitment to be acquired by another person.
Section 1026.35(b)(2)(iii)(C) requires that, as of the preceding
December 31st, or, if the application for the transaction was received
before April 1 of the current calendar year, as of either of the two
preceding December 31sts, the creditor and its affiliates that
regularly extended, during the applicable period, covered transactions,
as defined by Sec. 1026.43(b)(1), secured by first liens, together,
had total assets of less than $2 billion, adjusted annually by the
Bureau for inflation.
5. Requirement to hold in portfolio. Creditors generally must hold
a loan in portfolio to maintain the transaction's status as a qualified
mortgage under Sec. 1026.43(e)(5), subject to four exceptions. Unless
one of these exceptions applies, a loan is no longer a qualified
mortgage under Sec. 1026.43(e)(5) once legal title to the debt
obligation is sold, assigned, or otherwise transferred to another
person. Accordingly, unless one of the exceptions applies, the
transferee could not benefit from the presumption of compliance for
qualified mortgages under Sec. 1026.43(e)(1) unless the loan also met
the requirements of another qualified mortgage definition.
6. Application to subsequent transferees. The exceptions contained
in Sec. 1026.43(e)(5)(ii) apply not only to an initial sale,
assignment, or other transfer by the originating creditor but to
subsequent sales, assignments, and other transfers as well. For
example, assume Creditor A originates a qualified mortgage under Sec.
1026.43(e)(5). Six months after consummation, Creditor A sells the
qualified mortgage to Creditor B pursuant to Sec. 1026.43(e)(5)(ii)(B)
and the loan retains its qualified mortgage status because Creditor B
complies with the limits on asset size and number of transactions. If
Creditor B sells the qualified mortgage, it will lose its qualified
mortgage status under Sec. 1026.43(e)(5) unless the sale qualifies for
one of the Sec. 1026.43(e)(5)(ii) exceptions for sales three or more
years after consummation, to another qualifying institution, as
required by supervisory action, or pursuant to a merger or acquisition.
7. Transfer three years after consummation. Under Sec.
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec. 1026.43(e)(5)
is sold, assigned, or otherwise transferred three years or more after
consummation, the loan retains its status as a qualified mortgage under
Sec. 1026.43(e)(5) following the transfer. The transferee need not be
eligible to originate qualified mortgages under Sec. 1026.43(e)(5).
The loan will continue to be a qualified mortgage throughout its life,
and the transferee, and any subsequent transferees, may invoke the
presumption of compliance for qualified mortgages under Sec.
1026.43(e)(1).
8. Transfer to another qualifying creditor. Under Sec.
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec. 1026.43(e)(5)
may be sold, assigned, or otherwise transferred at any time to another
creditor that meets the requirements of Sec. 1026.43(e)(5)(i)(D). That
section requires that a creditor together with all its affiliates,
extended no more than 2,000 first-lien covered transactions that were
sold, assigned, or otherwise transferred by the creditor or its
affiliates to another person, or that were subject at the time of
consummation to a commitment to be acquired by another person; and
have, together with its affiliates that regularly extended covered
transactions secured by first liens, total assets less than $2 billion
(as adjusted for inflation). These tests are assessed based on
transactions and assets from the calendar year preceding the current
calendar year or from either of the two calendar years preceding the
current calendar year if the application for the transaction was
received before April 1 of the current calendar year. A qualified
mortgage under Sec. 1026.43(e)(5) transferred to a creditor that meets
these criteria would retain its qualified mortgage status even if it is
transferred less than three years after consummation.
9. Supervisory sales. Section 1026.43(e)(5)(ii)(C) facilitates
sales that are deemed necessary by supervisory agencies to revive
troubled creditors and resolve failed creditors. A qualified mortgage
under Sec. 1026.43(e)(5) retains its qualified mortgage status if it
is sold, assigned, or otherwise transferred to another person pursuant
to: A capital restoration plan or other action under 12 U.S.C. 1831o;
the actions or instructions of any person acting as conservator,
receiver or bankruptcy trustee; an order of a State or Federal
government agency with jurisdiction to examine the creditor pursuant to
State or Federal law; or an agreement between the creditor and such an
agency. A qualified mortgage under Sec. 1026.43(e)(5) that is sold,
assigned, or otherwise transferred under these circumstances retains
its qualified mortgage status regardless of how long after consummation
it is sold and regardless of the size or other characteristics of the
transferee. Section 1026.43(e)(5)(ii)(C) does not apply to transfers
done to comply with a generally applicable regulation with future
effect designed to implement, interpret, or prescribe law or policy in
the absence of a specific order by or a specific agreement with a
governmental agency described in Sec. 1026.43(e)(5)(ii)(C) directing
the sale of one or more qualified mortgages under Sec. 1026.43(e)(5)
held by the creditor or one of the other circumstances listed in Sec.
1026.43(e)(5)(ii)(C). For example, a qualified mortgage under Sec.
1026.43(e)(5) that is sold pursuant to a capital restoration plan under
12 U.S.C. 1831o would retain its status as a qualified mortgage
following the sale. However, if the creditor simply chose to sell the
same qualified mortgage as one way to comply with general regulatory
capital requirements in the absence of supervisory action or agreement
it would lose its status as a qualified mortgage following the sale
unless it qualifies under another definition of qualified mortgage.
10. Mergers and acquisitions. A qualified mortgage under Sec.
1026.43(e)(5) retains its qualified mortgage status if a creditor
merges with, is acquired by, or acquires another person regardless of
whether the creditor or its successor is eligible to originate new
qualified mortgages under Sec. 1026.43(e)(5) after the merger or
acquisition. However, the creditor or its successor can originate new
qualified mortgages under Sec. 1026.43(e)(5) only if it complies with
all of the requirements of Sec. 1026.43(e)(5) after the merger or
acquisition. For example, assume a creditor that originates 250 covered
transactions each year and originates qualified mortgages under Sec.
1026.43(e)(5) is acquired by a
[[Page 41778]]
larger creditor that originates 10,000 covered transactions each year.
Following the acquisition, the small creditor would no longer be able
to originate Sec. 1026.43(e)(5) qualified mortgages because, together
with its affiliates, it would originate more than 500 covered
transactions each year. However, the Sec. 1026.43(e)(5) qualified
mortgages originated by the small creditor before the acquisition would
retain their qualified mortgage status.
* * * * *
Paragraph 43(f)(1)(i)
1. Satisfaction of qualified mortgage requirements. Under Sec.
1026.43(f)(1)(i), for a mortgage that provides for a balloon payment to
be a qualified mortgage, the mortgage must satisfy the requirements for
a qualified mortgage in paragraphs (e)(2)(i)(A), (e)(2)(ii), and
(e)(2)(iii). Therefore, a covered transaction with balloon payment
terms must provide for regular periodic payments that do not result in
an increase of the principal balance, pursuant to Sec.
1026.43(e)(2)(i)(A); must have a loan term that does not exceed 30
years, pursuant to Sec. 1026.43(e)(2)(ii); and must have total points
and fees that do not exceed specified thresholds pursuant to Sec.
1026.43(e)(2)(iii).
* * * * *
Paragraph 43(f)(1)(iii)
1. Debt-to-income or residual income. A creditor must consider and
verify the consumer's monthly debt-to-income ratio or residual income
to meet the requirements of Sec. 1026.43(f)(1)(iii)(C). To calculate
the consumer's monthly debt-to-income or residual income for purposes
of Sec. 1026.43(f)(1)(iii)(C), the creditor may rely on the
definitions and calculation rules in Sec. 1026.43(c)(7) and its
accompanying commentary, except for the calculation rules for a
consumer's total monthly debt obligations (which is a component of
debt-to-income and residual income under Sec. 1026.43(c)(7)). For
purposes of calculating the consumer's total monthly debt obligations
under Sec. 1026.43(f)(1)(iii), the creditor must calculate the monthly
payment on the covered transaction using the payment calculation rules
in Sec. 1026.43(f)(1)(iv)(A), together with all mortgage-related
obligations and excluding the balloon payment.
* * * * *
Dated: June 22, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-13739 Filed 7-9-20; 8:45 am]
BILLING CODE 4810-AM-P
