Starting July 1, there will be a change in definitions of a Qualified Mortgage (QM) and RegsData®, First American’s loan level compliance solution, will be ready to handle them.
The definition of QM and the rules used to determine compliance have been a moving target for originators over the last seven months. It started last December when the Consumer Financial Protection Bureau (CFPB) announced that it would modify the original definition of QM, essentially dropping the debt-to-income (DTI) ratio cap of 43%, in favor of a price-based approach that the preceding director Kathleen Kraninger said at the time “strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”
At the beginning of this year, the U.S. Treasury and the Federal Housing Finance Agency (FHFA) entered into the Preferred Stock Purchase Agreement (PSPA) to de-risk Fannie Mae and Freddie Mac’s portfolios. One of the provisions of the PSPA says that after July 1st, 2021, the GSEs can only purchase loans that meet the CFPB’s newly revised definition of QM. However, prior to the GSEs’ announcement regarding this provision, the CFPB decided to postpone mandatory compliance with the new definition of QM until October 2022 and will continue allowing the use of the original definition of QM in the interim.
Despite the CFPB’s delay of the mandatory compliance period, the FHFA is sticking to its plan to use the new definition of QM, starting July 1st. This means that loans originated for sale to the GSEs and subject to QM must qualify as a General QM according to the new definition. The GSEs have also said the new QM definition must be used for any loans sold to Fannie or Freddie before August 31st or any in an MBS pool with an issue date on or before August 1st. (To add to the complications, there is a possibility that the U.S. Supreme Court may soon rule that the President has the authority to remove the head of FHFA. If that happens, and he is removed, there is a possibility that the new QM rule may be in limbo until 2022.)
To recap, loans with application dates on or before June 30th, 2021, and sold to the GSEs, can be qualified using the original General QM rule, the new General QM rule or the Temporary/Patch QM rule based on a loan being eligible for sale to Fannie or Freddie. Loans with applications dates after July 1st may still be originated using the original QM definition until October 2022 if they are being held in a portfolio or sold to private investors.
In early June, RegsData gave clients the option of testing loans against both the new QM rule and the original QM criteria. Starting July 1st, all loans flagged for sale to Fannie Mae or Freddie Mac will automatically be tested for compliance using the new QM rule.
At the account level, clients will also have the option of not “turning on” the new QM rules for loans they intend to hold or sell to private investors. Until October 2022, they will have the ability to toggle back and forth on a loan-by-loan basis to see if a loan is passing under the old rules or the new.