February 16, 2021
The Qualified Mortgage (QM) Rule and Recent Revisions
Background
APOR is a weekly average of the market rates and
Prior to the 2008 financial crisis, mortgage underwriting
points (upfront fees) found in the Primary Mortgage
standards were relaxed such that the ability of borrowers to
Market Survey conducted by Freddie Mac. The legal
repay their loans became linked to the favorable financial
protection provided by a safe harbor general QM means
conditions that existed at the time of origination. Following
that a borrower would not be able to assert that the
a rise in interest rates and a decline in underlying collateral
originator (and any subsequent secondary-market
values (house prices), these less favorable market
purchaser) failed to comply with any of the required
conditions generated mortgage delinquencies and defaults.
underwriting criteria.
The 2010 Dodd-Frank Wall Street Reform and Consumer
For a rebuttable presumption general QM, the
Protection Act (P.L. 111-203) sought to address this in part
difference between APR and APOR for first-lien
by including an ability-to-repay (ATR) requirement. On
mortgages may exceed 1.5 percentage points, but it is
January 30, 2013, the Consumer Financial Protection
limited to 2.25 percentage points under the revised final
Bureau (CFPB) finalized a rule implementing the ATR. The
rule. Under a rebuttable presumption, a borrower can
initial version of the ATR rule became effective on January
argue that the lender violated the ATR rule if the
10, 2014. A revised ATR rule, discussed in the last section
information presented to the lender during the loan
of this In Focus, was published on December 29, 2020.
application and origination processes would have
indicated that the borrower’s residual income was
The ATR requires a lender to make a reasonable good faith
insufficient to meet living expenses after paying the
determination of the consumer’s ability to repay the loan
mortgage and other debts.
according to its terms. Before making a residential
mortgage loan to a consumer, a lender must consider and
Revisiting the 43% DTI Requirement
verify with documentation eight underwriting criteria for
Limiting the borrower’s DTI to 43% was originally one of
the borrower: (1) current or reasonably expected income or
the underwriting requirements for a loan to receive safe
assets; (2) current employment status; (3) monthly
harbor QM status. Mortgages with DTIs exceeding 43%
payments of principal and interest on the primary mortgage
still receive QM status if they meet the eligibility
lien; (4) monthly payment on any junior mortgage lien; (5)
requirements to be insured or guaranteed by the Federal
monthly payment for mortgage-related obligations (e.g.,
Housing Administration (FHA), U.S. Department of
property taxes, homeowner association fees); (6) any
Veterans Affairs (VA), or U.S. Department of Agriculture
additional debt (e.g., automobile, credit card, education)
(USDA). Mortgages with DTIs exceeding 43% could also
obligations; (7) monthly debt-to-income (DTI) ratio or
qualify under another QM category, the Temporary GSE
residual income; and (8) credit history.
QM (or QM patch). The Temporary GSE QM had initially
granted safe harbor QM status to mortgages eligible for
The ATR rule provides multiple ways for a loan originator
purchase by Fannie Mae or Freddie Mac, two government-
to comply for legal purposes, one of which is by originating
sponsored enterprises (GSEs), until January 10, 2021.
a general qualified mortgage (QM). A general QM must
meet certain product-feature and underwriting
In January 2019, the CFPB released an assessment report of
requirements:
the ATR and QM rule, reaching conclusions similar to
those reported by some private-sector researchers. The
The mortgage must fully amortize, meaning that the
CFPB found that many originators limited their offerings to
borrower’s payments must be applied toward paying
mostly QM loans, and the DTI cap of 43% may have
down a portion of the principal loan balance over time.
restricted credit access. For example, the CFPB reported
A general QM cannot have a balloon or large principal
that the approval rates for non-QM high-DTI applicants
payment due at the end of the loan. Furthermore, a
declined across all credit tiers and income groupings since
general QM loan cannot negatively amortize, meaning
the QM rule took effect. Existing mortgage borrowers who
that its principal loan balance cannot increase over time.
had demonstrated the ability to repay their loans—but with
DTIs exceeding 43%—experienced reductions in credit
For a safe harbor general QM loan, the difference
access when attempting to refinance. These findings are
between the annual percentage rate (APR) and the
consistent with lenders’ preference for safe harbor legal
average prime offer rate (APOR) must not exceed 1.5
protection. The CFPB also reported that originators
percentage points for a first lien and 3.5 percentage
perceive Appendix Q—the list of required guidelines to
points for a junior lien. The APR includes both the
verify borrowers’ incomes and debt obligations for
annual interest cost and upfront fees spread over the life
mortgages with DTIs above 43% or ineligible for sale to the
of the mortgage and expressed as a percentage. The
GSEs or for federal mortgage insurance—to be unclear and
https://crsreports.congress.gov
The Qualified Mortgage (QM) Rule and Recent Revisions
complex in practice. In short, lenders lacked certainty that
a first-lien, fixed rate loan that has met certain performance
the use of Appendix Q would guarantee legal protection.
standards after being held in the portfolio of the originating
lender for at least 36 months, referred to as a seasoning
The CFPB also found that borrowers who applied for loans
period. Over the seasoning period, a loan can have no more
eligible for purchase or guarantee by one of the GSEs or
than two delinquencies of 30 days or more and no
federal agencies were less affected by the QM rule. The
delinquencies of 60 days. A seasoned QM must still comply
QM status received when mortgages are federally
with restrictions on product features, points, and fees and
guaranteed along with the Temporary GSE QM patch
meet certain underwriting requirements. Hence, a loan with
generally increased in importance as a result of many
an ATR rebuttable presumption can be seasoned into a safe
originators choosing to make primarily QM loans and
harbor QM and possibly encourage lending in markets such
reduce exposure to potential liability and litigation risks.
as manufactured housing originations, which may not
typically be eligible for safe harbor legal protections. The
Revised and Expanded QM Definitions
effective and compliance dates for the seasoned QM align
The CFPB has since revisited the QM definitions to
with those for the general QM final rule.
possibly achieve a better balance between ensuring a
consumer’s ability to repay and access to affordable
The incoming acting director of the CFPB has raised
mortgage credit. On December 29, 2020, the CFPB
concerns about the revised QM rule, directing the CFPB
published a final rule amending the definitions of the
staff to “[e]xplore options for preserving the status quo.”
general QM. The final rule is effective on March 1, 2021,
The chairwoman of the House Financial Services
meaning that prepared creditors may opt to comply with the
Committee has also indicated concern, but it is unclear what
revised general QM definition for applications received on
QM rule provisions may be under consideration for either
or after that date. The mandatory compliance date is July 1,
administrative or congressional change.
2021, and applies to all applications received on or after
that date. On October 20, 2020, the sunset date for the
Additional Resources
Temporary GSE QM definition was replaced with a
CFPB, “Ability-to-Repay and Qualified Mortgage
provision stating that it would be extended until the
Standards Under the Truth in Lending Act (Regulation Z),”
mandatory compliance date of the final rule amending the
78 Federal Register 6408-6620, January 30, 2013.
general QM definition. Consequently, the Temporary GSE
QM definition sunsets on July 1, 2021. Some revisions
CFPB, “Qualified Mortgage Definition Under the Truth in
include the following:
Lending Act (Regulation Z): General QM Loan Definition,”
85 Federal Register 86308-86400, December 29, 2020.
For the safe harbor general QM definition, the final rule
retains existing product features, underwriting
CFPB, “Qualified Mortgage Definition Under the Truth in
requirements, and limits on points and fees. The 43%
Lending Act (Regulation Z): Seasoned QM Loan
DTI ratio requirement, however, is replaced with
Definition,” 85 Federal Register 86402-86455, December
requirements based on the mortgage pricing that reflects
29, 2020.
the credit quality of borrowers. The rule continues to
grant safe harbor QM status to a first-lien (primary)
CFPB, “Qualified Mortgage Definition Under the Truth in
mortgage in which the difference between its APR and
Lending Act (Regulation Z): Extension of Sunset Date,” 85
the APOR does not exceed 1.5 percentage points—or
Federal Register 67938-67960, October 26, 2020.
3.5 percentage points for a subordinate-lien (secondary)
mortgage. Although a loan’s price is not a direct
CFPB, Ability-to-Repay and Qualified Mortgage Rule
measure of the ability to repay, the CFPB concludes that
Assessment Report, January 2019,
it is an effective indirect measure.
https://files.consumerfinance.gov/f/documents/cfpb_ability-
to-repay-qualified-mortgage_assessment-report.pdf.
The final rule removes Appendix Q and allows creditors
to use verification standards specified by the CFPB,
Department of Housing and Urban Development,
which include relevant provisions from the seller and
“Qualified Mortgage Definition for HUD Insured and
servicing guides of Fannie Mae, Freddie Mac, FHA,
Guaranteed Single Family Mortgages,” 78 Federal Register
VA, and USDA.
75215-75238, December 13, 2013.
The final rule provides an increase in the loan amount
Department of Veterans Affairs, “Loan Guaranty: Ability-
thresholds for first-lien loans with smaller balances and
to-Repay Standards and Qualified Mortgage Definition
subordinate liens, which tend to have higher APRs, for
Under the Truth in Lending Act,” 79 Federal Register
QM status. A first lien secured by a manufactured home
26620-26628, May 9, 2014.
(as defined under federal regulations that establish
construction and safety standards) may also be eligible
Department of Agriculture, Rural Housing Service, “Single
for QM status. The final rule provides the relevant
Family Housing Guaranteed Loan Program,” 81 Federal
thresholds that the APRs would be allowed to exceed
Register 26461-26465, May 3, 2016.
the APOR under certain circumstances.
Darryl E. Getter, Specialist in Financial Economics
In an accompanying rule, the CFPB also finalized a
seasoned QM loan definition. A seasoned QM is defined as
IF11761
https://crsreports.congress.gov
The Qualified Mortgage (QM) Rule and Recent Revisions
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