CFPB Issues New Rule for General QMs

The basic changes to QMs in the new rule are:

•  No more 43% DTI required for QM underwriting (by your larger and institutional lenders, small creditor exempted lenders never had a hard 43% limit)
• The DTI limit is replaced by “price-based thresholds” (justification for the change is laid out starting on page 37 and page 44, and says a bright line test is better and that loan pricing better reflects ability to repay considerations: “A loan’s price is not a direct measure of ability to repay, but the Bureau concludes that it is an effective indirect measure of ability to repay.”
• “General QM” loan definition is now defined as a loan in which the, “annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by less than 2.25 percentage points as of the date the interest rate is set”
  • Still two types of General QM – Safe Harbor and Rebuttable Presumption
    • Safe Harbor cannot exceed APOR by more than 1.5%
    • Rebuttable Presumption is therefore any loan with a rate between 1.5% - 2.25% above APOR
    • Above 2.25% but below 6.5% above APOR is a non-QM (but not a “High-Cost Mortgage Loan”)
    • Above 6.5% of APOR is a High-Cost Mortgage Loan
  • Note: There are important exceptions and additional rate-to-APOR thresholds for smaller balanced loans and specific provisions just for manufactured home loans that will be important to the manufactured housing industry, discussed in more detail below.

• Rules remain on income and debt verification, but the rule removes Appendix Q
  1. A creditor is 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
  2. Final rule provides debt and income verification method safe harbors if following one of the CFPB’s preferred methods, but it is not required that the CFPB methods are followed so as to, “provides creditors with the flexibility to develop other methods of compliance with the verification requirements”
     1. General Requirement – “The documentation provision requires a creditor to retain documentation to show how it applied its written policies and procedures, and, to the extent it deviated from them, to further retain documentation of how the creditor nonetheless took into account the required factors. The documentation examples listed in the comment (an underwriter worksheet or a final automated underwriting system certification, in combination with the creditor’s applicable underwriting standards and any applicable exceptions described in its policies and procedures, that show how these required factors were taken into account in the creditor’s ability-to-repay determination) can be sufficient to show how the creditor applied its written policies and procedures.”
     2. Safe Harbor Method(s) are the following:
        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.

• Even though Appendix Q is being repealed, many of the principals and processes of Appendix Q are still used either in the various six safe harbor options (above) or can be used in an individual underwriter’s internal process.
  • As a quick refresher, Appendix Q goes into great detail on how to determine and verify a borrower’s income and all the various sources that income can be derived. In addition, Appendix Q details a borrower’s various debts (or liabilities as it is called in the rule), and then how to calculate the borrower’s DTI.
• The new rule did not make changes to the existing underwriting requirements and limits on points and fees. For a review of the points and fee limitations as they apply to QM’s, refer to the Small Entity Compliance Guide, starting on page 43.
• There are specific exceptions and added loan rate flexibility for small loans and, specifically, manufactured housing loans (see below)

Small Loans and Manufactured Home Loans

The final rule addresses specifically small loan balance loans and manufactured home loans.  The discussion on MH and QMs starts on page 212.  In order for a loan to be considered a QM under the new rule that is a small loan or a manufactured home loan the loan amounts, and rates-to-APOR are as follows:

Small Loans:

1. Loan amounts greater than or equal to $66,156 (indexed for inflation) but less than $110,260 (indexed for inflation), the APR may not exceed APOR by 3.5 or more percentage points.
2. Loan amounts less than $66,156 (indexed for inflation), the APR may not exceed APOR by 6.5 or more percentage points.

Manufactured Home Loans:

When a loan is secured by a manufactured home with loan amounts less than $110,260 (indexed for inflation), the APR may not exceed APOR by 6.5 or more percentage points.

The CFPB added two comments to provide additional clarification on terms and phrases, specifically that the term “manufactured home,” - “means any residential structure as defined under HUD regulations establishing manufactured home construction and safety standards (24 CFR 3280.2).”

Modular or other factory-built homes that do not meet the HUD code standards are not manufactured homes for purposes of the new rules added flexibility.

The second comment on manufactured home loans makes clear that the final rule provisions apply to first-lien covered transactions less than $110,260 (indexed for inflation) that are secured by a manufactured home and land, or by a manufactured home only.  This means the new threshold applies to real property land-home manufactured home loans, as well as home-only personal property manufactured home loan transactions.

Coupling these all together specific for any MH loan results in the following breakdown:

• MH Loan amount above $110,260:
  • Safe Harbor QM if:
    • APR is less than 1.5% above APOR
  • Rebuttable Presumption QM if
    • APR is more than 1.5% but less than 2.25% above APOR
  • Non-QM, but not High-Cost
    • APR is more than 2.25% but less than 6.5% above APOR
  • High-Cost Loan if APR is more than 6.5% above APOR
• MH Loan amount above $50,000 – $110,260
  • Safe Harbor QM if:
    • APR is less than 1.5% above APOR
  • Rebuttable Presumption QM if
    • APR is more than 1.5% but less than 6.5% above APOR
  • Non-QM, but not High-Cost
    • For this category this has been effectively eliminated (squeezed out)
  • High-Cost Loan if APR is more than 6.5% above APOR
• MH Loan amount below $50,000 (note: the $50,000 threshold is one of the few limits in all of the Regs that does not change year over year indexed to inflation)
  • Safe Harbor QM if:
    • APR is less than 1.5% above APOR
  • Rebuttable Presumption QM if
    • APR is more than 1.5% but less than 6.5% above APOR
  • Non-QM, but not High-Cost
    • APR is more than 6.5% but less than 8.5% above APOR
  • High-Cost Loan if APR is more than 8.5% above APOR

Impact if any on Small Creditor Provisions

Many smaller lenders and owner-finance operations, particularly in the manufactured housing space, have been operating since the inception of the Dodd-Frank Act and resulting regulations under the “small creditor” provisions.

“Small creditors” are those with less than $2.23billion (for 2021, this is adjusted annually for inflation) in assets and originate fewer than 2,000 home loans per year.

As a small creditor, these types of lenders were granted two additional QM options – the Small Creditor QM and Balloon QM’s that are not available to larger lenders.  The most common in the manufactured housing small creditor space was the Small Creditor QM.  One major prior benefit for the small creditor status and access to the Small Creditor QM is that the small creditor was not limited by the hard 43% DTI threshold that larger lender were - prior to this rule change.

A Small Creditor QM was a loan that:

1. Is not negative-amortizing,
2. Is not interest-only,
3. Is not a balloon loan (though there is another special Balloon QM)
4. The term cannot exceed 30-years
5. The points and fees cannot exceed the specified QM limits
6. Is underwritten based on a fully-amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment.
7. The loan must not be subject to a forward commitment (an agreement made at or prior to consummation of a loan to sell the loan after consummation, other than to a creditor that itself is eligible to make Small Creditor QMs).
   1. Meaning the loan has to be held in portfolio by the small creditor or sold only to another small creditor.
8. The small creditor must consider and verify the consumer’s income or assets, and debts, alimony, and child support.
9. The small creditor must consider the consumer’s debt-to-income ratio (DTI) or residual income, although the rule sets no specific threshold for DTI or residual income

If all of the above are satisfied then the creditor has a Small Creditor QM, and the only distinction being if there is a rebuttable presumption or safe harbor towards compliance of the ability to repay rule, up to the threshold to not tip into a High-Cost Mortgage Loan.  If the loan’s APR is less than 3.5% above APOR, then it is safe harbor, if it is over 3.5%, and less than the applicable High-Cost threshold that size of loan, then it is a rebuttable presumption. 

There is a useful flowchart that outlines the Small Creditor provisions.

So what, if any, does the new rule do to existing provisions for small creditors?  Barely any changes and little to know practical changes to the prior small creditor provision, all of which will continue on. 

The provision in the regulations dealing with small creditors had to be modified to make some conforming changes to align with the language and proper references that tie to the General QM provisions, in which changes were made.

For example, in the small creditor section of the rules there was a reference to Appendix Q, but since that is no being removed, then so does the old reference. 

New language was added to the provision to make a small creditor QM in addition to the previous requirement that remains that a small creditor calculate and consider a borrower’s DTI as a part of its underwriting and now the creditor must also:

“(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 [the provisions specific on determining debt, alimony and child support(paragraph (c)(2)(vi) ) , and that the creditor must verify the information relied upon with reasonably reliable third-party records] (paragraph (c)(3))”

Conclusion and Text of Changes

The text of the new changes to the rule starts on page 315.  The CFPB also published an unofficial redlined version of the changes.

These new rules should benefit MH specific lenders.  It was encouraging to see that the CFPB gave direct attention to MH loans, recognized the unique nature of MH loans and provided additional flexibility and QM qualifications tailored for MH.