Apparently time flies when you’re Director Chopra of the Consumer Financial Protection Bureau (“CFPB”). On June 17, Director Chopra issued a blog post titled “Rethinking the Approach to Regulations,” indicating that the agency will move toward “simpler and clearer rules” that are easy to understand and enforce. As part of that effort, the agency will review certain rules that it either inherited or “pursued in its first decade of existence.” Among those rules is the CFPB’s Qualified Mortgage (“QM”) Rules.
The passage of time has admittedly been fuzzy since the pandemic. However, the CFPB has by all accounts undertaken a recent (and seemingly deep) review of the QM Rule. Beginning with a request for information in 2017, and ending with final rules in 2021, the CFPB issued a total of 12 Federal Register notices and rules, addressing everything from general QMs, temporary QMs (the “GSE Patch”), and seasoned QMs. In fact, the general QM definition is still in transition – switching to the new APR-based QM will not be mandatory until October. For an agency that is barely a decade old, the assertion that rules the agency pursued way back in its “first decade” are stale seems inapplicable to the QM Rule.
Nonetheless, Director Chopra indicated that the agency will, with regard to the QM Rule, “explore ways to spur streamlined modification and refinancing in the mortgage market.” That brings to mind the current QM status applicable to “non-standard” mortgage loans that are refinanced into standard loans. That non-standard refinancing QM, which dates back to the “first decade” (i.e., 2014) is very narrow. It allows a lender to achieve QM status by refinancing an adjustable rate, interest-only, or negative amortization loan into a loan without those features, but only if the lender is the current holder or servicer of the existing loan, the monthly payments for the new mortgage will be materially lower, and the consumer has generally made timely payments on the existing loan. The lender must consider whether the refinancing will prevent a default. In that vein, the new loan can only achieve this QM status if the existing non-standard loan was originated before January 10, 2014, and if the lender receives the consumer’s application for the new loan within two months after the existing loan has recast. (Otherwise the loan must meet a different QM definition or comply with the ability-to-repay requirements for non-QMs.) Perhaps the CFPB intends to consider ways to create a more usable QM status for streamlined refinancings in this decade. (Of course, even if the CFPB creates a new streamlined-refi QM, lenders would still need to consider whether state ability-to-repay requirements apply.)
While the June 17th blog post also mentioned spurring “streamlined modifications,” such transactions (which do not entail the satisfaction and replacement of the existing obligation) are not subject to the federal ability-to-repay/QM requirements. It is unclear what the agency’s proposals will be for spurring such modifications through the QM Rule.
Director Chopra also mentioned “assessing aspects of the ‘seasoning’ provisions.” So-called “seasoned QMs” are a recent (i.e., second decade) category. Seasoned QM status applies (or, more accurately, will apply) to a narrow set of loans that experience strong payment performance for 36 months. In very general terms (the specific parameters are quite detailed), a first-lien, fixed-rate, fully-amortizing loan that the lender has either held in portfolio or has transferred only once (and has not securitized), and on which the borrower has been able to make timely payments (which generally include payments in accordance with pandemic/disaster-related accommodations) for 36 months will achieve safe harbor QM status. While this seasoned QM status could be valuable in curing certain calculation deficiencies, a lender still must have considered and verified the borrower’s income, assets, and debt obligations, and met other QM-related requirements at the time of origination.
In spite of the Director’s assertion that “many of these rules have now been tested in the marketplace for many years and are in need of a fresh look,” the seasoned QM status has only been available for loans for which an application was received on or after March 1, 2021. The universe of loans that could season into QM status after 36 months is thus not yet fully determined, so once again the Director’s assertions – that the seasoned QM rule has been tested for many years – seem inapplicable here. While the CFPB hoped the seasoned QM would encourage innovation and broaden the credit box, the agency warned us that it was “considering whether to initiate a rulemaking to revisit” that category.
The blog post does not specify the nature of the agency’s review process, or whether it will include notice-and-comment rulemaking. It merely states that the agency aims for “simple bright lines” that protect consumers, promote compliance, and foster consistent interpretation and enforcement among agencies. The CFPB insists that it will continue to communicate clearly and that it welcomes public input. As it re-rethinks the QM Rule, even before that Rule is fully rolled out, clarity and public input will be welcome.