Are you compliant with the General Qualified Mortgage (QM) Final Rule? Although the Consumer Financial Protection Bureau extended the mandatory compliance date until October 1, 2022, it’s not too early for your financial institution to ensure you’ve updated your procedures.
The rule will require creditors to use the revised price-based General QM definition for applications received on or after October 1, 2022, but it’s optional to use it now for applications received since March 1, 2021.
Since investors are no longer allowing loans sold to the government-sponsored entities Fannie Mae and Freddie Mac to use the temporary Government-Sponsored Enterprises (GSE) patch QM definition, many financial institutions have already been using the price-based General QM definition.
What does the final rule require?
Financial institutions are required to have written policies and procedures under the new rule. Written policies and procedures must include how you take into account — pursuant to your underwriting standards — income or assets, debt obligations, alimony, child support and monthly debt-to-income (DTI) ratio or residual income in your ability-to-repay (ATR) determination.
You must also retain documentation showing how you took into account income or assets, debt obligations, alimony, child support and monthly DTI ratio or residual income in your ATR determination, including how you applied your policies and procedures, to meet the General QM requirements.
These policies and procedures will allow your employees to understand and reference all requirements of the new rule. Once implemented, employees should stop referencing the prior QM rules established in Appendix Q of Regulation Z, since they will be eliminated, along with the 43% DTI requirement. Your underwriting standards should state what the institution’s required DTI will be and what criteria are needed for exceptions to be made to the required DTI.
Loans must meet the following conditions to be considered a General QM under the revised definition:
The annual percentage rate (APR) cannot exceed the average prime offer rate (APOR) for a comparable transaction on the date the interest rate is set by:
- 2.25 or more percentage points for a first lien covered transaction with a loan amount greater than or equal to $110,260 (indexed for CPI).
- 3.5 or more percentage points for a first lien covered transaction with a loan amount greater than or equal to $66,156 (indexed for CPI) but less than $110,260.
- 6.5 or more percentage points for a first lien covered transaction with a loan amount less than $66,156.
- 6.5 or more percentage points for a first lien covered transaction secured by a manufactured home with a loan amount less than $110,260.
- 3.5 or more percentage points for a subordinate lien covered transaction with a loan amount greater than or equal to $66,156.
- 6.5 or more percentage points for a subordinate lien covered transaction with a loan amount less than $66,156.
The loan must be underwritten based on a fully amortizing schedule using the maximum rate permitted during the first five years, which was a prior requirement on General QM loans.
With the new rule, there is a change to the interest rate that you should use in the first five-year period from the date the first regular periodic payment will be due to determine the APR that will be used by your institution for the price-based limit. You must use the maximum possible interest rate during the first five years as the interest rate for the full term of the loan to calculate the APR that will be used when determining whether the APR exceeds the APOR.
This means the APR listed on a closing disclosure can vary from the APR that should be used to determine the APOR threshold tolerance when dealing with variable-rate or stepped-rate loans with an increase in rate within the first five years.
Consideration and verification of criteria
You must consider and verify the consumer’s current or reasonably expected income or assets (other than the value of the dwelling that secures the loan and any real property attached to that dwelling), debt obligations, alimony and child support. You should consider the consumer’s monthly DTI ratio or residual income as well. Update policies and procedures to indicate how your financial institution will include considered items in your ATR determination.
Use third-party records and reasonable methods to verify amounts relied on. Examples of third-party records include credit reports; verifications of employment, income and deposits; profit and loss statements reviewed by a third-party accountant; and creditor account statements for other accounts held by the consumer with the creditor.
You can rely on one or more of the following specified manuals to meet the verification requirement by meeting the manuals’ standards for verifying current or reasonably expected income or assets: Fannie Mae’s Single-Family Selling Guide, Freddie Mac’s Single-Family Seller/Servicer Guide, FHA’s Single-Family Housing Policy Handbook, VA’s Lender Handbook, USDA’s Field Office Handbook for the Direct Single-Family Housing, and USDA’s Handbook for the Single-Family Guaranteed Loan Program
Your institution should still adhere to Prior General QM loan criteria, including:
- Regular periodic payments
- No negative amortization
- No interest-only payments
- No balloon payments
- Term limit of 30 years
- Limitation on the points and fees as defined in the rule
File documentation is another key area financial institution employees should focus on, since it will provide evidence that they complied with General QM rules. Documentation should support the items your financial institution considered when underwriting the loan and making your ATR determination.
The file should also indicate whether the underwriting met the requirements of your financial institution’s own policy and procedures, and if not, you should notate documentation of policy exceptions. Often, the underwriting worksheets (manual or system generated) will produce a final QM status report that can support that your financial institution’s underwriting criteria were satisfied to meet not only QM status but ATR as well.
Wipfli can help you with compliance
Implementing detailed policies and/or procedures will allow your financial institution to ensure it is ready to meet the requirements for the new priced-based General QM prior to the mandatory compliance date of October 1, 2022. Wipfli is available to assist with any stage of the process, from developing procedures to training to testing for compliance with the new General QM Final Rule.
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