When the CFPB issued its Qualified Mortgage Rule it provided for a standard Qualified Mortgage which will be a permanent form of Qualified Mortgage; however, it also provided for a temporary Qualified Mortgage that: (1) would meet the prohibitions on risky loan features (e.g., negative amortization and interest only features); (2) would not exceed the limitations on points and fees for a standard Qualified Mortgage; and (3) would either be eligible for purchase or guarantee by FNMA and GNMA (the GSE’S) or be insured or guaranteed by HUD, the VA or the USDA. This authority will lapse once the GSE’s and other agencies develop their own Qualified Mortgage definitions; and this type of Qualified Mortgage will sunset seven years after the effective date of the rule, even if there is no action by those other agencies.
Responding to a number of criticisms, the CFPB has provided clarification that a loan does not have to actually be sold in the secondary market in order to be a Qualified Mortgage using this approach. Furthermore, a creditor does not have to comply with all GSE or agency requirements that apply to secondary market loan sales – only those GSE or agency requirements that relate to the consumer’s ability to repay the loan. So, a creditor can use the GSE’s and agency’s general standards concerning borrower, product, and mortgage eligibility and underwriting while ignoring any requirements that are wholly unrelated to assessing ability to repay and other risk-related factors. For instance, your bank would not have to be FNMA or GNMA approved, or even eligible, to use this Qualified Mortgage alternative. In all, this approach makes this alternative somewhat attractive – at least in the short-run.
In a very practical move, the CFPB has also issued clarification regarding the application of Appendix Q to the Qualified Mortgage Rule which establishes standards for determining such things as monthly debt and income of an applicant.
Appendix Q was developed using existing FHA underwriting guidelines as a foundation. However, the CFPB has now determined that some of those guidelines may not function well in a regulatory setting.
For instance, Appendix Q, as proposed, required a determination that a consumer’s income was “stable”. The CFPB now has realized that employers are not likely to commit to an employee’s continued employment for a host of reasons. Therefore, the CFPB has proposed to remove that requirement and substitute instead a requirement to document only a confirmation of current, ongoing employment. A consumer’s employment can be considered ongoing if the employer verifies current employment and does not indicate that the consumer’s employment is set to terminate.
Similarly, Appendix Q as proposed required a creditor to determine that a consumer’s income could reasonably be expected to continue throughout the first three years of the loan and that overtime and bonus income would also likely continue. The CFPB now is of the opinion that such predictions are not practical and might increase a creditor’s risk of litigation. So, the CFPB now proposes that a creditor only determine that a consumer’s income would reasonably be expected to continue based on documents provided, with no three year requirement. Similar changes are proposed for bonus and overtime income.
In all, these clarifications are helpful and perhaps reflect an effort on the part of the CFPB to work with creditors in an effort to achieve a feasible level of compliance. This most recent clarification indicates that further guidance can be expected in the near future. We will continue to monitor those developments.