The CFPB issued a final rule that creates a new type of QM – a Seasoned QM. The “seasoning” is for an amount of time (36-months). The new rule would convert originated non-QMs or rebuttable presumption QM’s into the new safe harbor Seasoned QM’s, if the payment history satisfies the new rule’s requirements.
Any creditor, regardless of size, can make a loan that is later eligible to become a Seasoned QM.
The CFPB’s rationale for the new rule was to, “encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are rebuttable presumption QMs under the existing QM categories.”
The effect of becoming a Seasoned QM is that there is then presumed compliance (safe harbor) with the ability-to-repay (ATR) requirements if such loans season in the manner set forth in this final rule.
To be eligible to become a Seasoned QM:
- The loan is secured by a first lien.
- The loan has a fixed rate, with regular, substantially equal periodic payments that are fully amortizing and no balloon payments.
- The loan term does not exceed 30 years; and
- The loan is not a high-cost mortgage (meaning the APR and points and fees are under the applicable threshold amounts for the type of loan)
- To become a Seasoned QM, the loan’s total points and fees also must not exceed specified limits.
- The loan must be originated considering the borrower’s DTI with verified assets and liabilities and in accordance with the provisions on verification and record retention from the new General QM
- Including the safe harbor option to underwrite and document in accordance with one of the six approved methods
- The original creditor, generally, must hold it in portfolio until the end of the seasoning period.
- Though there are several exceptions for the holding in portfolio requirements, which are discussed more later in this post.
- During the seasoning of at least 36-months, the borrower cannot have more than two delinquencies of 30 or more days and no delinquencies of 60 or more days
- Creditors can, however, accept deficient payments, within a payment tolerance of $50, on up to three occasions during the seasoning period without triggering a delinquency
- The 36-months starts from the first payment
- There is an exception related to a payment accommodation or deferral as a result of a disaster or a pandemic (COVID)
- The effective date is March 1, 2021, and the Season QM eligible loans are only loans creditors receive a loan application on or after March 1, 2021.
- This will not apply to existing portfolios of loans originated prior to March 1, 2021.
Portfolio and Performance Requirements
Under the new rule delinquency is defined as the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle by the date the periodic payment is due under the terms of the legal obligation. The failure to pay other amounts, such as late fees, does not constitute a delinquency for purposes of the performance requirements.
A loan cannot have more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period.
A periodic payment is 30 days delinquent when it is not paid before the due date of the following scheduled periodic payment. A periodic payment is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential periodic payments and does not make both sequential payments before the due date of the next scheduled periodic payment after the two sequential periodic payments.
The following are the few exceptions to the general requirement that to be eligible a loan must be held in portfolio of the original creditor for the seasoning period of 36-months:
- Transfers of ownership pursuant to certain supervisory sales;
- Transfers of ownership pursuant to certain mergers or acquisitions; or
- A loan may be sold, assigned, or otherwise transferred once before the end of the seasoning period, so long as the loan is not securitized as part of the sale, assignment, or transfer or at any other time before the end of the seasoning period
Applicable to only newly issued loans
The new rule is specific in its effective date and commentary that this new rule only applies to loans originated after the effective date of the rule – March 1, 2021. Meaning prior and existing portfolios of loans cannot become Seasoned QMs. But on a go forward basis after March 1, 2021 this new form of potential QM classification and thus added lender liability protection will be available.
As with all new regulations, it is difficult to fully predict the impact, use, and effectiveness of the new rule. However, for portfolio lenders that originate loans not in the typical QM space this new option could have profound impact on the later value and marketability of their loan portfolios if they subsequently convert to Seasoned QMs. There is an assumption once loans obtain QM status, they are more attractive to investors as well as larger banks and institutional lenders.