41716 Federal Register / Vol. 85, No. 133 / Friday, July 10, 2020 / Proposed Rules

BUREAU OF CONSUMER FINANCIAL transition away from the Temporary Steven Wrone, Senior Counsels, Office PROTECTION GSE QM loan definition and to ensure of Regulations, at 202–435–7700. If you access to responsible, affordable require this document in an alternative 12 CFR Part 1026 mortgage credit upon its expiration. electronic format, please contact CFPB_ [Docket No. CFPB–2020–0020] DATES: Comments must be received on [email protected]. or before September 8, 2020. SUPPLEMENTARY INFORMATION: RIN 3170–AA98 ADDRESSES: You may submit comments, I. Summary of the Proposed Rule Qualified Mortgage Definition Under identified by Docket No. CFPB–2020– 0020 or RIN 3170–AA98, by any of the The Ability-to-Repay/Qualified the Truth in Lending Act (Regulation Mortgage Rule (ATR/QM Rule or Rule) Z): General QM Loan Definition following methods: • Federal eRulemaking Portal: requires a creditor to make a reasonable, good faith determination of a AGENCY: Bureau of Consumer Financial https://www.regulations.gov. Follow the Protection. instructions for submitting comments. consumer’s ability to repay a residential • Email: 2020-NPRM-ATRQM- mortgage loan according to its terms. ACTION: Proposed rule with request for Loans that meet the Rule’s requirements public comment. [email protected]. Include Docket No. CFPB–2020–0020 or RIN 3170– for qualified mortgages (QMs) obtain SUMMARY: With certain exceptions, AA98 in the subject line of the message. certain protections from liability. The Regulation Z requires creditors to make • Mail/Hand Delivery/Courier: Rule defines several categories of QMs. One QM category defined in the Rule a reasonable, good faith determination Comment Intake—General QM is the General QM loan category. of a consumer’s ability to repay any Amendments, Bureau of Consumer General QM loans must comply with the residential mortgage loan, and loans that Financial Protection, 1700 G Street NW, Rule’s prohibitions on certain loan meet Regulation Z’s requirements for Washington, DC 20552. Please note that features, its points-and-fees limits, and ‘‘qualified mortgages’’ (QMs) obtain due to circumstances associated with its underwriting requirements. For certain protections from liability. One the COVID–19 pandemic, the Bureau General QM loans, the ratio of the category of QMs is the General QM loan discourages the submission of comments by mail, hand delivery, or consumer’s total monthly debt to total category. For General QM loans, the monthly income (DTI) ratio must not ratio of the consumer’s total monthly courier. Instructions: The Bureau encourages exceed 43 percent. The Rule requires debt to total monthly income (DTI ratio) that creditors must calculate, consider, must not exceed 43 percent. In this the early submission of comments. All submissions should include the agency and verify debt and income for purposes notice of proposed rulemaking, the of determining the consumer’s DTI ratio Bureau proposes certain amendments to name and docket number or Regulatory Information Number (RIN) for this using the standards contained in the General QM loan definition in appendix Q of Regulation Z. Regulation Z. Among other things, the rulemaking. Because paper mail in the Washington, DC area and at the Bureau A second, temporary category of QM Bureau proposes to remove the General loans defined in the Rule consists of is subject to delay, and in light of QM loan definition’s 43 percent DTI mortgages that (1) comply with the same difficulties associated with mail and limit and replace it with a price-based loan-feature prohibitions and points- hand deliveries during the COVID–19 threshold. Another category of QMs is and-fees limits as General QM loans and pandemic, commenters are encouraged loans that are eligible for purchase or (2) are eligible to be purchased or to submit comments electronically. In guarantee by either the Federal National guaranteed by the GSEs while under the general, all comments received will be Mortgage Association (Fannie Mae) or conservatorship of the FHFA. This posted without change to https:// the Federal Home Loan Mortgage proposal refers to these loans as www.regulations.gov. In addition, once Corporation (Freddie Mac) (government- Temporary GSE QM loans, and the the Bureau’s headquarters reopens, sponsored enterprises, or GSEs), while provision that created this loan category operating under the conservatorship or comments will be available for public is commonly known as the GSE Patch. receivership of the Federal Housing inspection and copying at 1700 G Street Unlike for General QM loans, the Rule Finance Agency (FHFA). The GSEs are NW, Washington, DC 20552, on official does not prescribe a DTI limit for currently under Federal business days between the hours of 10 Temporary GSE QM loans. Thus, a loan conservatorship. The Bureau established a.m. and 5 p.m. Eastern Time. At that can qualify as a Temporary GSE QM this category of QMs (Temporary GSE time, you can make an appointment to loan even if the consumer’s DTI ratio QM loans) as a temporary measure that inspect the documents by telephoning exceeds 43 percent, so long as the loan is set to expire no later than January 10, 202–435–9169. is eligible to be purchased or guaranteed 2021 or when the GSEs exit All comments, including attachments by either of the GSEs. In addition, for conservatorship. In a separate proposal and other supporting materials, will Temporary GSE QM loans, the Rule released simultaneously with this become part of the public record and does not require creditors to use proposal, the Bureau proposes to extend subject to public disclosure. Proprietary appendix Q to determine the the Temporary GSE QM loan definition information or sensitive personal consumer’s income, debt, or DTI ratio. to expire upon the effective date of final information, such as account numbers Under the Rule, the Temporary GSE amendments to the General QM loan or Social Security numbers, or names of QM loan definition expires with respect definition in Regulation Z (or when the other individuals, should not be to each GSE when that GSE exits GSEs cease to operate under the included. Comments will not be edited conservatorship or on January 10, 2021, conservatorship of the FHFA, if that to remove any identifying or contact whichever comes first. The GSEs are happens earlier). In this present information. currently in conservatorship. Despite proposed rule, the Bureau proposes the FOR FURTHER INFORMATION CONTACT: the Bureau’s expectations when the amendments to the General QM loan Benjamin Cady or Waeiz Syed, Rule was published in 2013, Temporary definition that are referenced in that Counsels, or Sarita Frattaroli, David GSE QM loan originations continue to separate proposal. The Bureau’s Friend, Joan Kayagil, Mark Morelli, represent a large and persistent share of objective with these proposals is to Amanda Quester, Alexa Reimelt, Marta the residential mortgage loan market. A facilitate a smooth and orderly Tanenhaus, Priscilla Walton-Fein, or significant number of Temporary GSE

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QM loans would not qualify as General consider the consumer’s income or covered transactions for which creditors QM loans under the current regulations assets, debt obligations, and DTI ratio or receive an application on or after this after the Temporary GSE QM loan residual income and verify the effective date. The Bureau tentatively definition expires. These loans would consumer’s current or reasonably determines that a six-month period not qualify as General QM loans either expected income or assets other than the between Federal Register publication of because the consumer’s DTI ratio is value of the dwelling (including any a final rule and the final rule’s effective above 43 percent or because the real property attached to the dwelling) date would give creditors enough time creditor’s method of documenting and that secures the loan and the consumer’s to bring their systems into compliance verifying income or debt does not current debt obligations, alimony, and with the revised regulations. The comply with appendix Q. Although child support. The proposal would Bureau does not intend to issue a final alternative loan options, including some remove appendix Q. To prevent rule amending the General QM loan other types of QM loans, would still be uncertainty that may result from definition early enough for it to take available to many consumers who could appendix Q’s removal, the proposal effect before April 1, 2021. The Bureau not qualify for General QM loans, the would clarify the requirements to requests comment on this proposed Bureau’s analysis of available data consider and verify a consumer’s effective date. The Bureau specifically indicates that many loans that are income, assets, debt obligations, seeks comment on whether there is a currently Temporary GSE QM loans alimony, and child support. The day of the week or time of month that would cost materially more for proposal would preserve the current would most facilitate implementation of consumers and many would not be threshold separating safe harbor from the proposed changes. made at all. rebuttable presumption QMs, under II. Background In a separate proposal (Extension which a loan is a safe harbor QM if its Proposal) released simultaneously with APR exceeds APOR for a comparable A. Dodd-Frank Act Amendments to the this proposal, the Bureau proposes to transaction by less than 1.5 percentage Truth in Lending Act extend the Temporary GSE QM loan points as of the date the interest rate is The Dodd-Frank Wall Street Reform definition to expire upon the effective set (or by less than 3.5 percentage points and Consumer Protection Act (Dodd- date of final amendments to the General for subordinate-lien transactions). Frank Act) amended the Truth in QM loan definition or when the GSEs The Bureau is proposing a price-based Lending Act (TILA) to establish, among exit conservatorship, whichever comes approach to replace the specific DTI other things, ability-to-repay (ATR) first. In this proposal, the Bureau limit because it is concerned that requirements in connection with the proposes the amendments to the imposing a DTI limit as a condition for origination of most residential mortgage General QM loan definition that are QM status under the General QM loan loans.1 The amendments were intended referenced in the Extension Proposal. definition may be overly burdensome ‘‘to assure that consumers are offered The Bureau is issuing this proposal to and complex in practice and may and receive residential mortgage loans amend the General QM loan definition unduly restrict access to credit because on terms that reasonably reflect their because it is concerned that retaining it provides an incomplete picture of the the existing General QM loan definition consumer’s financial capacity. In ability to repay the loans and that are with the 43 percent DTI limit after the understandable and not unfair, particular, the Bureau is concerned that 2 Temporary GSE QM loan definition conditioning QM status on a specific deceptive or abusive.’’ As amended, expires would significantly reduce the DTI limit may impair access to TILA prohibits a creditor from making size of QM and could significantly responsible, affordable credit for some a residential mortgage loan unless the reduce access to responsible, affordable consumers for whom it might be creditor makes a reasonable and good credit. The Bureau is proposing a price- appropriate to presume ability to repay faith determination based on verified based General QM loan definition to for their loans at consummation. For the and documented information that the replace the DTI-based approach because reasons set forth below, the Bureau consumer has a reasonable ability to 3 it preliminarily concludes that a loan’s preliminarily concludes that a price- repay the loan. price, as measured by comparing a based General QM loan definition is TILA identifies the factors a creditor loan’s annual percentage rate (APR) to appropriate because a loan’s price, as must consider in making a reasonable the average prime offer rate (APOR) for measured by comparing a loan’s APR to and good faith assessment of a a comparable transaction, is a strong APOR for a comparable transaction, is a consumer’s ability to repay. These indicator of a consumer’s ability to strong indicator of a consumer’s ability factors are the consumer’s credit history, repay and is a more holistic and flexible to repay and is a more holistic and current and expected income, current measure of a consumer’s ability to repay flexible measure of a consumer’s ability obligations, DTI ratio or residual income than DTI alone. to repay than DTI alone. after paying non-mortgage debt and Under the proposal, a loan would In addition, although the Bureau is mortgage-related obligations, meet the General QM loan definition in proposing to remove the 43 percent DTI employment status, and other financial § 1026.43(e)(2) only if the APR exceeds limit and adopt a price-based approach APOR for a comparable transaction by for the General QM loan definition, the 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, sections 1411– less than two percentage points as of the Bureau requests comment on certain 12, 1414, 124 Stat. 1376 (2010); 15 U.S.C. 1639c. date the interest rate is set. The proposal alternative approaches that would retain 2 15 U.S.C. 1639b(a)(2). would provide higher thresholds for a DTI limit but would raise it above the 3 15 U.S.C. 1639c(a)(1). TILA section 103 defines loans with smaller loan amounts and for current limit of 43 percent and provide ‘‘residential mortgage loan’’ to mean, with some subordinate-lien transactions. The a more flexible set of standards for exceptions including open-end credit plans, ‘‘any consumer credit transaction that is secured by a proposal would retain the existing verifying debt and income in place of mortgage, deed of trust, or other equivalent product-feature and underwriting appendix Q. consensual security interest on a dwelling or on requirements and limits on points and The Bureau proposes that the effective residential real property that includes a dwelling.’’ fees. Although the proposal would date of a final rule relating to this 15 U.S.C. 1602(dd)(5). TILA section 129C also exempts certain residential mortgage loans from the remove the 43 percent DTI limit from proposal would be six months after ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) the General QM loan definition, the publication in the Federal Register. The (exempting reverse mortgages and temporary or proposal would require that the creditor revised regulations would apply to bridge loans with a term of 12 months or less).

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resources other than equity in the 1. General QM Loans whether a mortgage satisfies the 43 dwelling or real property that secures One category of QM loans defined by percent DTI limit for General QM loans. 4 repayment of the loan. A creditor, the Rule consists of ‘‘General QM The standards in appendix Q were however, may not be certain whether its loans.’’ 10 A loan is a General QM loan adapted from guidelines maintained by ATR determination is reasonable in a if: the Federal Housing Administration particular case, and it risks liability if a • (FHA) of HUD when the January 2013 The loan does not have negative- 15 court or an agency, including the amortization, interest-only, or balloon- Final Rule was issued. Appendix Q Bureau, later concludes that the ATR payment features, a term that exceeds 30 addresses how to determine a determination was not reasonable. years, or points and fees that exceed consumer’s employment-related income TILA addresses this uncertainty by specified limits; 11 (e.g., income from wages, commissions, defining a category of loans—called • The creditor underwrites the loan and retirement plans); non-employment QMs—for which a creditor ‘‘may based on a fully amortizing schedule related income (e.g., income from presume that the loan has met’’ the ATR using the maximum rate permitted alimony and child support payments, requirements.5 The statute generally during the first five years; 12 investments, and property rentals); and defines a QM to mean any residential • The creditor considers and verifies liabilities, including recurring and mortgage loan for which: contingent liabilities and projected the consumer’s income and debt 16 • There is no negative amortization, obligations in accordance with obligations. interest-only payments, or balloon appendix Q; 13 and 2. Temporary GSE QM Loans payments; • The consumer’s DTI ratio is no A second, temporary category of QM • The loan term does not exceed 30 more than 43 percent, determined in loans defined by the Rule, Temporary years; accordance with appendix Q.14 • GSE QM loans, consists of mortgages The total points and fees generally Appendix Q contains standards for that (1) comply with the Rule’s do not exceed 3 percent of the loan calculating and verifying debt and prohibitions on certain loan features, its amount; income for purposes of determining • underwriting requirements, and its The income and assets relied upon limitations on points and fees; 17 and (2) 10 for repayment are verified and The QM definition is related to the definition are eligible to be purchased or of Qualified Residential Mortgage (QRM). Section documented; guaranteed by either GSE while under • 15G of the Securities Exchange Act of 1934, added The underwriting uses a monthly by section 941(b) of the Dodd-Frank Act, generally the conservatorship of the FHFA.18 payment based on the maximum rate requires the securitizer of asset-backed securities Unlike for General QM loans, during the first five years, uses a (ABS) to retain not less than five percent of the Regulation Z does not prescribe a DTI payment schedule that fully amortizes credit risk of the assets collateralizing the ABS. 15 U.S.C. 78o–11. Six Federal agencies (not including limit for Temporary GSE QM loans. the loan over the loan term, and takes the Bureau) are tasked with implementing this Thus, a loan can qualify as a Temporary into account all mortgage-related requirement. Those agencies are the Board of GSE QM loan even if the DTI ratio obligations; and Governors of the Federal Reserve System (Board), exceeds 43 percent, as long as the DTI • The loan complies with any the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), ratio meets the applicable GSE’s DTI guidelines or regulations established by the Securities and Exchange Commission, the requirements and other underwriting the Bureau relating to the ratio of total FHFA, and the U.S. Department of Housing and criteria. In addition, income and debt monthly debt to monthly income or Urban Development (HUD) (collectively, the QRM for such loans, and DTI ratios, generally alternative measures of ability to pay agencies). Section 15G of the Securities Exchange Act of 1934 provides that the credit risk retention are verified and calculated using GSE regular expenses after payment of total requirements shall not apply to an issuance of ABS standards, rather than appendix Q. The monthly debt.6 if all of the assets that collateralize the ABS are Temporary GSE QM loan category—also QRMs. See 15 U.S.C. 78o–11(c)(1)(C)(iii), (4)(A) and B. The Ability-to-Repay/Qualified known as the GSE Patch—is scheduled (B). Section 15G requires the QRM agencies to to expire with respect to each GSE when Mortgage Rule jointly define what constitutes a QRM, taking into consideration underwriting and product features that GSE exits conservatorship or on In January 2013, the Bureau issued a that historical loan performance data indicate result January 10, 2021, whichever comes final rule amending Regulation Z to in a lower risk of default. See 15 U.S.C. 78o– first.19 implement TILA’s ATR requirements 11(e)(4). Section 15G also provides that the definition of a QRM shall be ‘‘no broader than’’ the 7 15 (January 2013 Final Rule). The January definition of a ‘‘qualified mortgage,’’ as the term is 78 FR 6408, 6527–28 (Jan. 30, 2013) (noting 2013 Final Rule became effective on defined under TILA section 129C(b)(2), as amended that appendix Q incorporates, with certain January 10, 2014, and the Bureau by the Dodd-Frank Act, and regulations adopted modifications, the definitions and standards in HUD Handbook 4155.1, Mortgage Credit Analysis 8 thereunder. 15 U.S.C. 78o–11(e)(4)(C). In 2014, the amended it several times through 2016. for Mortgage Insurance on One-to-Four-Unit QRM agencies issued a final rule adopting the risk Mortgage Loans). This proposal refers to the January 2013 retention requirements. 79 FR 77601 (Dec. 24, 16 Final Rule and later amendments to it 2014). The final rule aligns the QRM definition with 12 CFR 1026, appendix Q. 17 collectively as the Ability-to-Repay/ the QM definition defined by the Bureau in the 12 CFR 1026.43(e)(2)(i) through (iii). Qualified Mortgage Rule, the ATR/QM ATR/QM Rule, effectively exempting securities 18 12 CFR 1026.43(e)(4). comprised of loans that meet the QM definition 19 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule Rule, or the Rule. The ATR/QM Rule from the risk retention requirement. The final rule created several additional categories of QM loans. implements the statutory ATR also requires the agencies to review the definition The first additional category consisted of mortgages provisions discussed above and defines of QRM no later than four years after the effective eligible to be insured or guaranteed (as applicable) several categories of QM loans.9 date of the final risk retention rules. In 2019, the by HUD (FHA loans), the U.S. Department of QRM agencies initiated a review of certain Veterans Affairs (VA loans), the U.S. Department of provisions of the risk retention rule, including the Agriculture (USDA loans), and the Rural Housing 4 15 U.S.C. 1639c(a)(3). QRM definition. 84 FR 70073 (Dec. 20, 2019). Service (RHS loans). 12 CFR 1026.43(e)(4)(ii)(B)-(E). 5 15 U.S.C. 1639c(b)(1). Among other things, the review allows the QRM This temporary category of QM loans no longer exists because the relevant Federal agencies have 6 15 U.S.C. 1639c(b)(2)(A). agencies to consider the QRM definition in light of since issued their own QM rules. See, e.g., 24 CFR 7 78 FR 6408 (Jan. 30, 2013). any changes to the QM definition adopted by the Bureau. 203.19 (HUD rule). Other categories of QM loans 8 See 78 FR 35429 (June 12, 2013); 78 FR 44686 provide more flexible standards for certain loans 11 12 CFR 1026.43(e)(2)(i)–(iii). (July 24, 2013); 78 FR 60382 (Oct. 1, 2013); 79 FR originated by certain small creditors. 12 CFR 12 65300 (Nov. 3, 2014); 80 FR 59944 (Oct. 2, 2015); 12 CFR 1026.43(e)(2)(iv). 1026.43(e)(5), (f); cf. 12 CFR 1026.43(e)(6) 81 FR 16074 (Mar. 25, 2016). 13 12 CFR 1026.43(e)(2)(v). (applicable only to covered transactions for which 9 12 CFR 1026.43(c), (e). 14 12 CFR 1026.43(e)(2)(vi). the application was received before April 1, 2016).

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In the January 2013 Final Rule, the loans are actually purchased or ‘‘higher priced.’’ The Rule generally Bureau explained why it created the guaranteed—to leave room for non-GSE defines a ‘‘higher-priced’’ loan to mean Temporary GSE QM loan category. The private investors to return to the market a first-lien mortgage with an APR that Bureau observed that it did not believe and secure the same legal protections as exceeded APOR for a comparable that a 43 percent DTI ratio ‘‘represents the GSEs.27 The Bureau believed that, as transaction as of the date the interest the outer boundary of responsible the market recovered, the GSEs and the rate was set by 1.5 or more percentage lending’’ and acknowledged that Federal agencies would be able to points; or a subordinate-lien mortgage historically, and even after the financial reduce their market presence, the with an APR that exceeded APOR for a crisis, over 20 percent of mortgages percentage of Temporary GSE QM loans comparable transaction as of the date exceeded that threshold.20 The Bureau would decrease, and the market would the interest rate was set by 3.5 or more believed, however, that, as DTI ratios shift toward General QM loans and non- percentage points.34 A creditor that increase, ‘‘the general ability-to-repay QM loans above a 43 percent DTI makes a QM loan that is not ‘‘higher procedures, rather than the qualified ratio.28 The Bureau’s view was that a priced’’ is entitled to a conclusive mortgage framework, is better suited for shift towards non-QM loans could be presumption that it has complied with consideration of all relevant factors that supported by the non-GSE private the Rule—i.e., the creditor receives a go to a consumer’s ability to repay a market—i.e., by institutions holding safe harbor from liability.35 A creditor mortgage loan’’ and that ‘‘[o]ver the long such loans in portfolio, selling them in that makes a loan that meets the term . . . there will be a robust and whole, or securitizing them in a standards for a QM loan but is ‘‘higher sizable market for prudent loans beyond rejuvenated private-label securities priced’’ is entitled to a rebuttable the 43 percent threshold even without (PLS) market. The Bureau noted that, presumption that it has complied with the benefit of the presumption of pursuant to its statutory obligations the Rule.36 compliance that applies to qualified under the Dodd-Frank Act, it would mortgages.’’ 21 assess the impact of the ATR/QM Rule The Bureau explained in the January At the same time, the Bureau noted five years after the Rule’s effective date, 2013 Final Rule why it was adopting that the mortgage market was especially and the assessment would provide an different presumptions of compliance 37 fragile following the financial crisis, and opportunity to analyze the Temporary based on the pricing of QMs. The GSE-eligible loans and federally insured GSE QM loan definition.29 Bureau noted that the line it was or guaranteed loans made up a drawing is one that has long been significant majority of the market.22 The 3. Presumption of Compliance for QM recognized as a rule of thumb to Bureau believed that it was appropriate Loans separate prime loans from subprime to consider for a period of time that In the January 2013 Final Rule, the loans.38 The Bureau noted that loan GSE-eligible loans were originated with Bureau considered whether QM loans pricing is calibrated to the risk of the an appropriate assessment of the should receive a conclusive loan and that the historical performance consumer’s ability to repay and presumption (i.e., a safe harbor) or a of prime and subprime loans indicates therefore warranted being treated as rebuttable presumption of compliance greater risk for subprime loans.39 The QMs.23 The Bureau believed in 2013 with the ATR requirements. The Bureau Bureau also noted that consumers taking that this temporary category of QM concluded that the statute is ambiguous out subprime loans tend to be less loans would, in the near term, help to as to whether a creditor originating a sophisticated and have fewer options ensure access to responsible, affordable QM loan receives a safe harbor or a and that the most abuses prior to the credit for consumers with DTI ratios rebuttable presumption that it has financial crisis occurred in the subprime above 43 percent, as well as facilitate complied with the ATR requirements.30 market.40 The Bureau concluded that compliance by creditors by promoting The Bureau noted that its analysis of the these factors warrant imposing the use of widely recognized, federally statutory construction and policy heightened standards for higher-priced related underwriting standards.24 implications demonstrated that there are loans.41 For prime loans, however, the In making the Temporary GSE QM sound reasons for adopting either Bureau found that lower rates are loan definition temporary, the Bureau interpretation.31 The Bureau concluded indicative of ability to repay and noted sought to ‘‘provide an adequate period that the statutory language does not that prime loans have performed for economic, market, and regulatory mandate either interpretation and that significantly better than subprime conditions to stabilize’’ and ‘‘a the presumptions should be tailored to loans.42 The Bureau concluded that if a reasonable transition period to the promote the policy goals of the statute.32 loan met the product and underwriting general qualified mortgage The Bureau ultimately interpreted the requirements for QM and was not a definition.’’ 25 The Bureau believed that statute to provide for a rebuttable higher-priced loan, there are sufficient the Temporary GSE QM loan definition presumption of compliance with the grounds for concluding that the creditor would benefit consumers by preserving ATR requirements but used its satisfied the ATR requirements.43 The access to credit while the mortgage adjustment authority to establish a Bureau noted that the conclusive industry adjusted to the ATR/QM conclusive presumption of compliance presumption may reduce uncertainty Rule.26 The Bureau also explained that for loans that are not ‘‘higher priced.’’ 33 and litigation risk and may promote it structured the Temporary GSE QM Under the Rule, a creditor that makes enhanced competition in the prime loan definition to cover loans eligible to a QM loan is protected from liability be purchased or guaranteed by either of presumptively or conclusively, 34 12 CFR 1026.43(b)(4). the GSEs—regardless of whether the depending on whether the loan is 35 12 CFR 1026.43(e)(1)(i). 36 12 CFR 1026.43(e)(1)(ii). 20 78 FR 6408, 6527 (Jan. 30, 2013). 27 Id. at 6534. 37 78 FR 6408 at 6506, 6510–14. 21 Id. at 6527–28. 28 Id. 38 Id. at 6408. 22 Id. at 6533–34. 29 Id. 39 Id. at 6511. 23 Id. at 6534. 30 Id. at 6511. 40 Id. 24 Id. at 6533. 31 Id. at 6507. 41 Id. 25 Id. at 6534. 32 Id. at 6511. 42 Id. 26 Id. at 6536. 33 Id. at 6514. 43 Id.

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market.44 The Bureau also noted that the the HOEPA amendments at §§ 226.31, procedures mandated for all creditors.55 litigation risk for rebuttable 226.32, and 226.33 51 of Regulation Z.52 However, the 2008 HOEPA Final Rule presumption QMs likely would be quite In 2001, the Board issued rules made clear that even if the creditor modest and would have a limited expanding HOEPA’s protections to more follows the required and optional impact on access to credit.45 loans by revising the APR threshold for criteria, the creditor obtained a The Bureau also noted in the January first-lien mortgage loans and revising presumption (not a safe harbor) of 2013 Final Rule that policymakers have the ATR provisions to provide for a compliance with the repayment ability long relied on pricing to determine presumption of a violation of the rule if requirement. The consumer therefore which loans should be subject to the creditor engages in a pattern or could still rebut or overcome that additional regulatory requirements.46 practice of making high-cost mortgages presumption by showing that, despite That history of reliance on pricing without verifying and documenting the following the required and optional continues to provide support for a price- consumer’s repayment ability. procedures, the creditor nonetheless based approach to the General QM loan In 2008, the Board exercised its disregarded the consumer’s ability the definition. For example, in 1994 authority under HOEPA to extend loan. Congress amended TILA by enacting the certain consumer protections Home Ownership and Equity Protection concerning a consumer’s ability to repay C. The Bureau’s Assessment of the Act (HOEPA) as part of the Riegle and prepayment penalties to a new Ability-to-Repay/Qualified Mortgage Community Development and category of ‘‘higher-priced mortgage Rule 47 loans’’ (HPMLs) 53 with APRs that are Regulatory Improvement Act of 1994. Section 1022(d) of the Dodd-Frank lower than those prescribed for high- HOEPA was enacted as an amendment Act requires the Bureau to assess each cost loans but that nevertheless exceed to TILA to address abusive practices in of its significant rules and orders and to the APOR by prescribed amounts. This refinancing and home-equity mortgage publish a report of each assessment new category of loans was designed to loans with high interest rates or high within five years of the effective date of 48 include subprime credit, including fees. The statute applied generally to the rule or order.56 In June 2017, the subprime purchase money mortgage closed-end mortgage credit but excluded Bureau published a request for purchase money mortgage loans and loans. Specifically, the Board exercised information in connection with its reverse mortgages. Coverage was its authority to revise HOEPA’s assessment of the ATR/QM Rule triggered if a loan’s APR exceeded restrictions on high-cost loans based on (Assessment RFI).57 These comments comparable Treasury securities by a conclusion that the revisions were are summarized in general terms in part specified thresholds for particular loan necessary to prevent unfair and III below. types, or if points and fees exceeded deceptive acts or practices in eight percent of the total loan amount or connection with mortgage loans.54 The In January 2019, the Bureau published a dollar threshold.49 For high-cost loans Board concluded that a prohibition on its ATR/QM Rule Assessment Report.58 meeting either of those thresholds, making individual loans without regard The Report included findings about the HOEPA required creditors to provide for repayment ability was necessary to effects of the ATR/QM Rule on the special pre-closing disclosures, ensure a remedy for consumers who are mortgage market generally, as well as restricted prepayment penalties and given unaffordable loans and to deter specific findings about Temporary GSE certain other loan terms, and regulated irresponsible lending, which injures QM loan originations. various creditor practices, such as individual consumers. The 2008 The Report found that loans with extending credit without regard to a HOEPA Final Rule provided a higher DTI levels have been associated consumer’s ability to repay the loan. presumption of compliance with the with higher levels of ‘‘early HOEPA also created special substantive higher-priced mortgage ability-to-repay delinquency’’ (i.e., delinquency within protections for high-cost mortgages, requirements if the creditor follows two years of origination), which can such as prohibiting a creditor from certain procedures regarding serve as a proxy for measuring engaging in a pattern or practice of underwriting the loan payment, consumer repayment ability at extending a high-cost mortgage to a assessing the DTI ratio or residual consummation across a wide pool of consumer based on the consumer’s income, and limiting the features of the loans.59 The Report also found that the collateral without regard to the loan, in addition to following certain Rule did not eliminate access to credit consumer’s repayment ability, including for high-DTI consumers—i.e., the consumer’s current and expected in the statute, HOEPA expanded the Board’s consumers with DTI ratios above 43 income, current obligations, and rulemaking authority, among other things, to percent—who qualify for loans eligible 50 prohibit acts or practices the Board found to be employment. The Board implemented unfair and deceptive in connection with mortgage for purchase or guarantee by either of loans. the GSEs, that is, Temporary GSE QM 44 Id. 51 Subsequently renumbered as sections 1026.31, loans.60 On the other hand, based on 45 Id. at 6511–12. 1026.32, and 1026.33 of Regulation Z. application-level data obtained from 46 52 Id. at 6413–14, 6510–11. See 60 FR 15463 (Mar. 24, 1995). nine large lenders, the Report found that 47 Riegle Community Development and 53 Under the Board’s 2008 HOEPA Final Rule, a Regulatory Improvement Act, Public Law 103–325, higher-priced mortgage loan is a consumer credit the Rule eliminated between 63 and 70 108 Stat. 2160 (1994). transaction secured by the consumer’s principal percent of high-DTI home purchase 48 As originally enacted, HOEPA defined a class dwelling with an APR that exceeds APOR for a of ‘‘high-cost mortgages,’’ which were generally comparable transaction, as of the date the interest 55 See 12 CFR 1026.34(a)(4)(iii), (iv). closed-end home-equity loans (excluding home- rate is set, by 1.5 or more percentage points for 56 purchase loans) with APRs or total points and fees loans secured by a first lien on the dwelling, or by 12 U.S.C. 5512(d). exceeding prescribed thresholds. Mortgages covered 3.5 or more percentage points for loans secured by 57 82 FR 25246 (June 1, 2017). by HOEPA have been referred to as ‘‘HOEPA a subordinate lien on the dwelling. 73 FR 44522 58 See generally Bureau of Consumer Fin. Prot., loans,’’ ‘‘Section 32 loans,’’ or ‘‘high-cost (July 30, 2008) (2008 HOEPA Final Rule). The Ability to Repay and Qualified Mortgage mortgages.’’ definition of a ‘‘higher-priced mortgage loan’’ Assessment Report (Jan. 2019) (Assessment Report), 49 The Dodd-Frank Act adjusted the baseline for includes practically all ‘‘high-cost mortgages’’ https://files.consumerfinance.gov/f/documents/ the APR comparison, lowered the points-and-fees because the latter transactions are determined by cfpb_ability-to-repay-qualified-mortgage_ threshold, and added a prepayment trigger. higher loan pricing threshold tests. See 12 CFR assessment-report.pdf. 50 TILA section 129(h); 15 U.S.C. 1639(h). In 226.35(a)(1). 59 See, e.g., id. at 83–84, 100–05. addition to the disclosures and limitations specified 54 73 FR 44522 (July 30, 2008). 60 See, e.g., id. at 10, 194–96.

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loans that were not Temporary GSE QM Report, in the years since the ATR/QM unwilling or lack the funding to make loans.61 Rule took effect, house prices have the loans.80 One main finding about Temporary increased and consumers hold more The Bureau expects that each of these GSE QM loans was that such loans mortgage and other debt (including features of the mortgage market that continued to represent a ‘‘large and student loan debt), all of which have concentrate lending within the persistent’’ share of originations in the caused the DTI ratio distribution to shift Temporary GSE QM loan definition will conforming segment of the mortgage upward.69 The Assessment Report noted largely persist through the current market.62 As discussed, the GSEs’ share that the share of GSE home purchase January 10, 2021 sunset date. of the conventional, conforming loans with DTI ratios above 43 percent purchase-mortgage market was large D. Effects of the COVID–19 Pandemic on has increased since the ATR/QM Rule Mortgage Markets before the ATR/QM Rule, and the took effect in 2014.70 The available data The COVID–19 pandemic has had a Assessment found a small increase in suggest that such high-DTI lending has significant effect on the U.S. economy. that share since the Rule’s effective date, declined in the non-GSE market relative reaching 71 percent in 2017.63 The Economic activity has contracted, some to the GSE market.71 The non-GSE Assessment Report noted that, at least businesses have partially or completely market has constricted even with for loans intended for sale in the closed, and millions of workers have respect to highly qualified consumers; secondary market, creditors generally become unemployed. The pandemic has offer a Temporary GSE QM loan even those with higher incomes and higher also affected mortgage markets and has when a General QM loan could be credit scores are representing a greater resulted in a contraction of mortgage 72 originated.64 share of denials. credit availability for many consumers, The continued prevalence of The Assessment Report found that a including those that would be Temporary GSE QM loan originations is third possible reason for the persistence dependent on the non-QM market for contrary to the Bureau’s expectation at of Temporary GSE QM loans is the financing. The pandemic’s impact on the time it issued the ATR/QM Rule in structure of the secondary market.73 If both the secondary market for new 2013.65 The Assessment Report creditors adhere to the GSEs’ guidelines, originations and on the servicing of discussed several possible reasons for they gain access to a robust, highly existing mortgages has contributed to the continued prevalence of Temporary liquid secondary market.74 In contrast, this contraction, as described below. GSE QM loan originations. The Report while private market securitizations 1. Secondary Market Impacts and first highlighted commenters’ concerns have grown somewhat in recent years, with the perceived lack of clarity in Implications for Mortgage Origination their volume is still a fraction of their Markets appendix Q and found that such pre-crisis levels.75 There were less than concerns ‘‘may have contributed to $20 billion in new origination PLS The economic disruptions associated investors’—and at least derivatively, issuances in 2017, compared with $1 with the COVID–19 pandemic have creditors’—preference’’ for Temporary trillion in 2005,76 and only 21 percent restricted the flow of credit in the U.S. GSE QM loans instead of originating of new origination PLS issuances in economy, including the mortgage loans under the General QM loan 2017 were non-QM issuances.77 To the market. During periods of economic 66 definition. In addition, the Bureau has extent that private securitizations have distress, many investors seek to not revised appendix Q since 2013, occurred since the ATR/QM Rule took purchase safer instruments and as while other standards for calculating effect in 2014, the majority of new tensions and uncertainty rose in mid- and verifying debt and income have origination PLS issuances have March of 2020, investors moved rapidly been updated more frequently.67 ANPR consisted of prime jumbo loans made to towards cash and government commenters also expressed concern 81 consumers with strong credit securities. Indeed, the yield on the 10- with appendix Q and stated that the characteristics, and these securities have year Treasury note, which moves in the Temporary GSE QM loan definition has a low share of non-QM loans.78 The opposite direction as the note’s price, benefited creditors and consumers by declined while mortgage rates increased enabling creditors to originate QMs Assessment Report notes that the Temporary GSE QM loan definition may between February 2020 and March without having to use appendix Q. 82 itself be inhibiting the growth of the 2020. This widening spread was The Assessment Report noted that a exacerbated by a large supply of non-QM market.79 However, the Report second possible reason for the mortgage-backed securities (MBS) also notes that it is possible that this continued prevalence of Temporary GSE entering the market, as investors in MBS market might not exist even with a QM loans is that the GSEs were able to sold large portfolios of agency MBS.83 narrower Temporary GSE QM loan accommodate the demand for mortgages As a result, in March of 2020, the lack definition, if consumers were unwilling above the General QM loan definition’s of investor demand to purchase to pay the premium charged to cover the DTI limit of 43 percent as the DTI ratio mortgages made it difficult for creditors potential litigation risk associated with distribution in the market shifted to originate loans, as many creditors rely 68 non-QMs, which do not have a upward. According to the Assessment on the ability to profitably sell loans in presumption of compliance with the 61 See, e.g., id. at 10–11, 117, 131–47. ATR requirements, or if creditors were 80 Id. 62 Id. at 188. Because the Temporary GSE QM 81 The Quarterly CARES Act Report to Congress: loan definition generally affects only loans that 69 Id. Hearing Before the S. Comm. on Banking, Housing, conform to the GSEs’ guidelines, the Assessment 70 Id. at 194–95. and Urban Affairs, 116th Cong. 2–3 (2020) Report’s discussion of the Temporary GSE QM loan 71 (statement of Jerome H. Powell, Chairman, Board of definition focused on the conforming segment of Id. at 119–20. 72 Id. at 153. Governors of the Federal Reserve System). the market, not on non-conforming (e.g., jumbo) 82 loans. 73 Id. at 196. Laurie Goodman et al., Urban Institute, Housing Finance at a Glance, Monthly Chartbook, 63 Id. at 191. 74 Id. (Mar. 26, 2020), https://www.urban.org/research/ 64 75 Id. at 192. Id. publication/housing-finance-glance-monthly- 65 Id. at 13, 190, 238. 76 Id. chartbook-march-2020. 66 Id. at 193. 77 Id. at 197. 83 Agency MBS are backed by loans guaranteed by 67 Id. at 193–94. 78 Id. at 196. Fannie Mae, Freddie Mac, and the Government 68 Id. at 194. 79 Id. at 205. National Mortgage Association (Ginnie Mae).

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the secondary market to generate the jumbo financing dropped nearly 22 survey from the Mortgage Bankers liquidity to originate new loans. This percent in the first quarter of 2020. Association, from March 2, 2020 to June resulted in mortgages becoming more Banks increased interest rates and 7, 2020, the total number of loans in expensive for both homebuyers and narrowed the product offering to forbearance grew from 0.25 percent to homeowners looking to refinance. consumers with pristine credit profiles, 8.55 percent, with Ginnie Mae loans On March 15, 2020, the Board as these loans must be held on portfolio having the largest growth from 0.19 announced that it would increase its when the secondary market for non- percent to 11.83 percent.93 holdings of agency MBS by at least $200 agency MBS contracts.90 To address the anticipated liquidity billion.84 On March 23, 2020, the Board shortage, on April 10, 2020, Ginnie Mae 2. Servicing Market Impacts and announced that it would remove this released guidance on a Pass-Through Implications for Origination Markets limit and purchase agency MBS ‘‘in the Assistance Program whereby Ginnie amounts needed to support smooth Anticipating that a number of Mae will provide financial assistance at market functioning and effective homeowners would struggle to pay their a fixed interest rate to servicers facing transmission of monetary policy to mortgages due to the pandemic and a principal and interest shortfall as a broader financial conditions and the related economic impacts, Congress last resort. On April 7, 2020, Ginnie Mae economy.’’ 85 The Board took these passed and the President signed the also announced approval of a servicing actions to stabilize the secondary market Coronavirus Aid, Relief, and Economic advance financing facility, whereby and support the continued flow of Security Act (the CARES Act) in March mortgage servicing rights are securitized mortgage credit. With these purchases, 2020. The CARES Act provides and sold to private investors. This market conditions have improved additional protections for borrowers change may alleviate some of the substantially, and the Board has since whose mortgages are purchased or liquidity pressures that may cause a slowed its pace of purchases.86 This has securitized by a GSE and certain servicer to draw on the Pass-Through helped to stabilize mortgage rates, federally-backed mortgages.91 The Assistance Program. resulting in a decline in mortgage rates CARES Act mandates a 60-day Because many mortgage servicers also since the Board’s intervention. foreclosure moratorium for such originate the loans they service, many Non-agency MBS 87 are generally mortgages. The CARES Act also allows creditors have responded to the risk of perceived by investors as riskier than borrowers to request up to 180 days of elevated forbearances and higher-than- agency MBS, and non-QM lending has forbearance due to a COVID–19-related expected monthly advances by declined as a result. Issuance of non- financial hardship, with an option to imposing additional underwriting agency MBS declined by 8.2 percent in extend the forbearance period for an standards for new originations. These the first quarter of 2020, with nearly all additional 180 days. new underwriting standards include the transactions completed in January Following the passage of the CARES more stringent requirements for non- and February, before the COVID–19 Act, some mortgage servicers remain QM, jumbo, and government loans.94 pandemic began to affect the economy obligated to make some principal and For example, one major bank significantly.88 Nearly all major non-QM interest payments to investors in GSE announced on April 13, 2020, that it and Ginnie Mae securities, even if would require prospective home creditors ceased making loans in March 92 and April. In May of 2020, issuers of consumers are not making payments. purchasers to have a minimum 700 non-agency MBS began to test the Servicers also remain obligated to make FICO score and 20 percent down market with deals collateralized by non- escrowed real estate tax and insurance payment. By lending only to consumers QM loans largely originated prior to the payments to local taxing authorities and with high credit scores, lower DTI crisis. Moreover, several non-QM insurance companies. Significant ratios, or significant liquid reserves, creditors—which largely depend on the liquidity is needed to fulfill servicer creditors are managing their risk by obligations to security holders. While ability to sell loans in the secondary reducing the likelihood that a newly- servicers are required to hold liquid market in order to fund new loans— originated loan will require a reserves to cover anticipated advances, have begun to resume originations, forbearance plan. significantly higher-than-expected Moreover, several large warehouse albeit with a tighter credit box.89 Prime forbearance rates over an extended providers—i.e., creditors that provide period of time may lead to liquidity 84 Press Release, Bd. of Governors of the Fed. financing to mortgage originators and Reserve Sys., Federal Reserve issues FOMC shortages particularly among many non- servicers—have restricted the ability of statement (Mar. 15, 2020), https:// bank servicers. According to a weekly non-banks to fund loans on their www.federalreserve.gov/newsevents/pressreleases/ warehouse line by prohibiting the monetary20200315a.htm. 218034-non-agency-mortgage-securitization- funding of loans to consumers with 85 Press Release, Bd. of Governors of the Fed. opening-up-after-pause. lower credit scores. These types of Reserve Sys., Federal Reserve announces extensive 90 Brandon Ivey, Jumbo Originations Drop Nearly new measures to support the economy (Mar. 23, 22% in First Quarter (2020) https:// restrictions mitigate the warehouse 2020), https://www.federalreserve.gov/newsevents/ www.insidemortgagefinance.com/articles/218028- lender’s exposure in the event a non- pressreleases/monetary20200323b.htm. jumbo-originations-drop-nearly-22-in-first-quarter. bank fails or is unable to sell the loan 86 The Quarterly CARES Act Report to Congress: 91 Coronavirus Aid, Relief, and Economic Hearing Before the S. Comm. on Banking, Housing, prior to the consumer requesting a Security Act, Public Law 116–136 (2020). (Includes forbearance.95 and Urban Affairs, 116th Cong. 3 (2020) (statement loans backed by HUD, the U.S. Department of the of Jerome H. Powell, Chairman, Board of Governors Agriculture, the U.S. Department of Veterans Affairs of the Federal Reserve System). (VA), Fannie Mae, and Freddie Mac). 93 Press Release, Mortgage Banker Association, 87 Non-agency MBS are not backed by loans 92 The GSEs typically repurchase loans out of the Share of Mortgage Loans in Forbearance Increases guaranteed by Fannie Mae, Freddie Mac or the trust after they fall 120 days delinquent, after which to 8.55%, (June 15, 2020), https://www.mba.org/ Ginnie Mae. This includes securities collateralized the servicer is no longer required to advance 2020-press-releases/june/share-of-mortgage-loans- by non-QM loans. principal and interest, but Ginnie Mae requires in-forbearance-increases-to-855. 88 Brandon Ivey, Non-Agency MBS Issuance servicers to advance principal and interest until the 94 Maria Volkova, FHA/VA Lenders Raise Credit Slowed in First Quarter (2020), https:// default is resolved. On April 21, 2020, the FHFA Score Requirements (2020), https:// www.insidemortgagefinance.com/articles/217623- confirmed that servicers of GSE loans will only be www.insidemortgagefinance.com/articles/217636- non-agency-mbs-issuance-slowed-in-first-quarter. required to advance four months of mortgage fhava-lenders-raise-fico-credit-score-requirements. 89 Brandon Ivey, Non-Agency Mortgage payments, regardless of whether the GSEs 95 On April 22, 2020, the FHFA announced the Securitization Opening Up After Pause (2020), repurchase the loans from the trust after 120 days GSEs would be permitted to purchase certain loans https://www.insidemortgagefinance.com/articles/ of delinquency. whereby the borrower requested a forbearance prior

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As of mid-June, historically low enforcement, supervision, rulemaking, Bureau should adopt standards that do interest rates combined with a leveling market monitoring, and financial not directly measure a consumer’s off in forbearance rates have resulted in education activities.99 As part of the call personal finances.103 The Bureau an increase in refinance activity that has for evidence, the Bureau published requested comment on how much time been primarily concentrated in the requests for information relating to, industry would need to change its agency sector, helping to mitigate some among other things, the Bureau’s practices in response to any changes the of the servicing liquidity concerns. rulemaking process,100 the Bureau’s Bureau makes to the General QM loan However, it is unclear how quickly non- adopted regulations and new definition.104 The Bureau received 85 banks will return to the non-QM market rulemaking authorities,101 and the comments on the ANPR from businesses even after the mortgage market in Bureau’s inherited regulations and in the mortgage industry (including general recovers. inherited rulemaking authorities.102 In creditors), consumer advocacy groups, response to the call for evidence, the elected officials, individuals, and III. The Rulemaking Process Bureau received comments on the ATR/ research centers. The Bureau has solicited and received QM Rule from stakeholders, including 1. Direct Measures of a Consumer’s substantial public and stakeholder input consumer advocacy groups and industry Personal Finances on issues related to this proposed rule. groups. The comments addressed a In addition to the Bureau’s discussions variety of topics, including the General Commenters largely supported with and communications from industry QM loan definition, appendix Q, and moving away from using the 43 percent stakeholders, consumer advocates, other the Temporary GSE QM loan definition. DTI limit as a stand-alone General QM Federal agencies,96 and members of The comments also raised concerns underwriting criterion. While a few Congress, the Bureau issued requests for about, among other things, the risks of commenters supported maintaining the information (RFIs) in 2017 and 2018 and allowing the Temporary GSE QM loan current General QM loan definition’s 43 in July 2019 issued an advance notice of definition to expire without any changes percent DTI limit as a stand-alone proposed rulemaking regarding the to the General QM loan definition or criterion along with clarifying revisions ATR/QM Rule (ANPR). The input from appendix Q. The concerns raised in to appendix Q, the large majority of these RFIs and from the ANPR is briefly these comments were similar to those commenters—representing the mortgage summarized below. raised in response to the Assessment industry, consumer advocacy groups, and research centers—supported either A. The Requests for Information RFI, discussed above. eliminating a DTI limit, replacing it In June 2017, the Bureau published a B. The Advance Notice of Proposed with other methods of measuring a request for information in connection Rulemaking consumer’s ability to repay, such as with the Assessment Report On July 25, 2019, the Bureau issued cash flow underwriting or residual (Assessment RFI).97 In response to the an advance notice of proposed income, or supplementing it with Assessment RFI, the Bureau received rulemaking regarding the ATR/QM Rule additional compensating factors. These approximately 480 comments from (ANPR). The ANPR stated the Bureau’s commenters asserted that, as a stand- creditors, industry groups, consumer tentative plans to allow the Temporary alone factor, DTI has limited advocacy groups, and individuals.98 GSE QM loan definition to expire in predictiveness of a consumer’s ability to The comments addressed a variety of January 2021 or after a short extension, repay and has an adverse impact on topics, including the General QM loan if necessary, to facilitate a smooth and responsible access to credit for low-to- definition and the 43 percent DTI limit; orderly transition away from the moderate income and minority perceived problems with, and potential Temporary GSE QM loan definition. homeowners. changes and alternatives to, appendix Q; The Bureau also stated that it was Many commenters suggested the and how the Bureau should address the considering whether to propose Bureau consider replacing DTI with an expiration of the Temporary GSE QM revisions to the General QM loan alternative measure of a consumer’s loan definition. The comments definition in light of the potential ability to repay, such as residual income expressed a range of ideas for expiration of the Temporary GSE QM or cash flow underwriting. While some addressing the expiration of the loan definition and requested comments commenters indicated these alternative Temporary GSE QM loan definition, on several topics related to the General measures are more accurate predictors from making the definition permanent, QM loan definition. These topics of ability to repay, others suggested the to applying the definition to other included: (1) Whether and how the Bureau conduct additional studies of mortgage products, to extending it for Bureau should revise the DTI limit in these alternative measures and the various periods of time, or some the General QM loan definition; (2) effectiveness of existing standards, such combination of those suggestions. Other whether the Bureau should supplement as the VA’s residual income test. comments stated that the Temporary or replace the DTI limit with another Other commenters suggested the GSE QM loan definition should be method for directly measuring a Bureau promulgate a General QM loan eliminated or permitted to expire. consumer’s personal finances; (3) definition that allows certain Beginning in January 2018, the whether the Bureau should revise compensating factors to supplement a Bureau issued a general call for appendix Q or replace it with other specific DTI limit. Under this approach, evidence seeking comment on its standards for calculating and verifying a the rule would set a specific DTI limit consumer’s debt and income; and (4) (e.g., 43 percent) but would permit loans to the sale of the loan for a limited period of time and at a higher cost. whether, instead of a DTI limit, the with higher DTI ratios to be originated 96 The Bureau has consulted with agencies as QMs if the creditor determined that including the FHFA, the Board, FHA, the FDIC, the 99 See Bureau of Consumer Fin. Prot., Call for OCC, the Federal Trade Commission, the National Evidence, https://www.consumerfinance.gov/ 103 84 FR 37155, 37155, 37160–62 (July 31, 2019). Credit Union Administration, and the Department policy-compliance/notice-opportunities-comment/ 104 The Bureau stated that if the amount of time of the Treasury. archive-closed/call-for-evidence (last updated Apr. industry would need to change its practices in 97 82 FR 25246 (June 1, 2017). 17, 2018). response to the rule depends on how the Bureau 98 See Assessment Report, supra note 58, 100 83 FR 10437 (Mar. 9, 2018). revises the General QM loan definition, the Bureau appendix B (summarizing comments received in 101 83 FR 12286 (Mar. 21, 2018). requested time estimates based on alternative response to the Assessment RFI). 102 83 FR 12881 (Mar. 26, 2018). possible definitions.

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certain compensating factors were for elimination of appendix Q, the the existing General QM protections are present. Commenters identified several commenters that advocated for retaining sufficient—including the prohibited potential compensating factors, appendix Q generally suggested the product features, the points-and-fees including cash reserves or past payment Bureau should revise appendix Q to cap, and the ATR requirements to performance history. Advocates for this modernize the standards and ease consider and verify a consumer’s debt, approach pointed to the GSEs’ industry compliance. income or assets, DTI, or residual income. They argued that the rule underwriting standards, which permit 2. Alternatives to Direct Measures of a should continue to rely on the interest loans with DTI ratios between 43 and 50 Consumer’s Personal Finances percent if compensating factors are rate spread between the APR and the present, as evidence that higher DTI Many commenters argued that there APOR to distinguish those QM loans loans with appropriate consideration of are alternatives that are more predictive eligible for a safe harbor from those compensating factors can result in of loan performance and a consumer’s eligible for a rebuttable presumption of affordable loans. Some of the ability to repay than stand-alone direct compliance. Proponents of this commenters suggested the current measures of a consumer’s personal approach argued that creditors use a General QM loan definition’s 43 percent finances such as DTI or residual income. wide variety of factors in the lending DTI limit could be responsibly Most commenters noting these decision and consumers with higher- increased. Some commenters alternatives advocated for eliminating risk lending attributes receive higher recommended that the Bureau the DTI limit entirely and suggested that interest rates to compensate creditors incorporate compensating factors into loan product features and loan pricing and investors for the added risk. the General QM loan definition but also should serve as the primary factors that Accordingly, these commenters argued adopt an overall DTI limit above which determine a loan’s QM status. that the APR spread above the loans could not be originated as General Commenters that opposed incorporating benchmark APOR is more predictive of QMs, regardless of any compensating alternatives to direct measures of a the general creditworthiness of a loan factors. Under this approach, similar to consumer’s personal finances into the and a consumer’s ability to repay than the GSEs’ current underwriting General QM loan definition generally stand-alone measures such as DTI. standards, creditors could originate argued that a creditor’s ATR While some commenters suggested that loans under the General QM loan determination is separate and distinct the rule should retain the existing price definition with DTI ratios under a from a creditor’s decision on whether to threshold separating safe harbor QM originate a loan. For example, they certain threshold (e.g., 43 percent) loans from rebuttable presumption QM argued that because creditors consider without compensating factors, could loans, which is 1.5 percentage points factors unrelated to ability to repay in originate loans under the General QM above APOR for most loans, others determining their cumulative loss loan definition with DTI ratios between suggested that it would be appropriate exposure—such as the amount of equity that threshold and a higher threshold to increase the threshold. Other in a property—creditors can originate (e.g., 50 percent) if the creditor commenters suggested there could be an loans that may not be affordable for identifies certain compensating factors, additional pricing threshold, above consumers in the long-term. but could not originate loans under the which loans would be designated as Commenters cited asset-based lending General QM loan definition with DTI non-QM. prior to the crisis, when some creditors ratios above the higher threshold. Commenters also provided input on originated unaffordable loans with the the distinction between a safe harbor The Bureau also solicited comment on intention of refinancing the loan prior to presumption of compliance and a whether the rule should retain appendix default or otherwise believed they were rebuttable presumption of compliance Q as the standard for calculating and protected from loss in the event of with the ATR requirements. While verifying debt and income if the rule default due to the consumer’s equity in commenters offered different views retains a direct measure of a consumer’s the property. Commenters critical of about whether 1.5 percentage points personal finances for General QM. price-based approaches to the General over APOR is appropriate for Nearly all commenters agreed that QM loan definition also stated that loan distinguishing between safe harbor and appendix Q in its existing form is pricing includes a wide variety of rebuttable presumption QMs, or if it insufficient—specifically, that the factors unrelated to credit quality, such should be increased, most commenters requirements lack clarity in certain as the value of the mortgage servicing advocated for maintaining a safe harbor. areas, which leaves creditors uncertain rights. These commenters also raised However, several consumer advocacy of the QM status of their loans. concerns about the pro-cyclical nature groups suggested all QM loans should Commenters also criticized appendix Q of loan pricing. They argued that be subject to a rebuttable presumption for being overly prescriptive and mortgage interest rate spreads tend to of compliance. Several commenters outdated in other areas and therefore contract during economic expansions, noted that the 1.5 percentage point over lacking the flexibility to adapt to such that a price-based approach to the APOR threshold would changing market conditions. Proponents General QM loan definition could grant disproportionately prevent smaller of eliminating the DTI limit entirely QM status to loans that exceed loans and loans for manufactured stated that appendix Q could be consumers’ ability to repay and increase housing from being originated as QMs. eliminated without replacement and housing prices. In contrast, they claimed They noted that creditors typically that the Bureau could instead publish that mortgage interest rate spreads tend charge more to recover fixed costs on supervisory guidance or best practices to expand during economic small loans than on larger loans with to assist creditors in satisfying the ATR contractions, inhibiting access to credit. equivalent risk attributes. requirements. Other commenters Commenters critical of price-based Some commenters advocated for an suggested that the rule supplement approaches also raised concerns that approach whereby the QM appendix Q or replace it with these approaches are vulnerable to determination would be based primarily reasonable alternatives that allow for lender manipulation. on the likelihood of default or loss given more flexibility, such as the GSE or FHA Most commenters that advocated for default as determined by an standards for verifying income and debt. removing the DTI limit entirely from the underwriting model. One commenter Although most commenters advocated General QM loan definition suggested recommended that QM status be

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determined by expected default rates in January 10, 2021 or the date the GSEs A. TILA stressed economic conditions, given exit conservatorship, whichever occurs TILA section 105(a). Section 105(a) of certain origination characteristics. Other first. The Bureau sought comment on TILA directs the Bureau to prescribe commenters suggested a Bureau- whether a short extension would be regulations to carry out the purposes of approved automated underwriting necessary to minimize market TILA and states that such regulations model could determine a loan’s QM disruption and to potentially facilitate may contain such additional status. Proponents of these approaches an orderly transition to a new General requirements, classifications, argued that an underwriting model QM loan definition. While some differentiations, or other provisions and would reflect a more holistic industry and consumer advocates may further provide for such consideration of relevant factors but commented that the Temporary GSE adjustments and exceptions for all or remove the risk that creditors misprice QM loan definition should be made any class of transactions that the Bureau or underprice loans due to competitive permanent, many commenters judges are necessary or proper to pressures. While many commenters supported its expiration following a effectuate the purposes of TILA, to acknowledged the operational short extension to revise the General prevent circumvention or evasion complexity associated with the Bureau QM loan definition. Industry thereof, or to facilitate compliance developing and maintaining an commenters stated that the length of therewith.107 A purpose of TILA is ‘‘to automated underwriting model, they time to implement a new General QM assure a meaningful disclosure of credit argued that this approach would loan definition would largely be terms so that the consumer will be able provide creditors with the certainty of a determined by the scale and complexity to compare more readily the various loan’s QM status while most accurately of the revisions to the General QM loan credit terms available to him and avoid assessing the consumer’s ability to definition. Commenters supporting the the uninformed use of credit.’’ 108 sustain the mortgage payment. price-based approach indicated that a Additionally, a purpose of TILA Commenters also argued that relatively short implementation period sections 129B and 129C is to assure that consumer performance over an likely would be necessary, given the consumers are offered and receive extended period should be considered approach would largely be a residential mortgage loans on terms that sufficient evidence that the creditor simplification of the existing General reasonably reflect their ability to repay adequately assessed a consumer’s ability QM construct. Other commenters the loans and that are understandable to repay at origination. They suggested linking the date of the and not unfair, deceptive, or abusive.109 recommended that a loan that is Temporary GSE QM loan definition As discussed in the section-by-section originated as a non-QM or rebuttable expiration to a period following the analysis below, the Bureau is proposing presumption QM loan should be eligible publication date of the final General QM to issue certain provisions of this to ‘‘season’’ into a QM safe harbor loan rule, such as one year. As noted above, proposed rule pursuant to its if the consumer makes timely payments the Bureau is issuing a separate NPRM rulemaking, adjustment, and exception for a pre-determined length of time. to address the timing of the expiration authority under TILA section 105(a). Commenters pointed to the GSE of the Temporary GSE QM Loan TILA section 129C(b)(2)(A). TILA representation and warranty framework definition. section 129C(b)(2)(A)(vi) provides the as precedent for this concept and argued Bureau with authority to establish that a creditor’s legal exposure to the IV. Legal Authority guidelines or regulations relating to ATR requirement should also sunset ratios of total monthly debt to monthly The Bureau is proposing to amend accordingly. However, several income or alternative measures of Regulation Z pursuant to its authority commenters opposed allowing loans to ability to pay regular expenses after under TILA and the Dodd-Frank Act. season into QMs. They argued that a payment of total monthly debt, taking period of successful repayment is Section 1061 of the Dodd-Frank Act into account the income levels of the insufficient to presume conclusively transferred to the Bureau the ‘‘consumer borrower and such other factors as the that the creditor reasonably determined financial protection functions’’ Bureau may determine relevant and ability to repay at origination, that previously vested in certain other consistent with the purposes described creditors would engage in gaming to Federal agencies, including the Board. in TILA section 129C(b)(3)(B)(i).110 As minimize defaults during the seasoning The Dodd-Frank Act defines the term discussed in the section-by-section period, and that seasoning would ‘‘consumer financial protection analysis below, the Bureau is proposing inappropriately prevent consumers from function’’ to include ‘‘all authority to to issue certain provisions of this raising lack of ability to repay as a prescribe rules or issue orders or proposed rule pursuant to its authority defense to foreclosure. guidelines pursuant to any Federal under TILA section 129C(b)(2)(A)(vi). The Bureau is considering adding a consumer financial law, including TILA section 129C(b)(3)A), (B)(i). seasoning approach to the ATR/QM performing appropriate functions to TILA section 129C(b)(3)(B)(i) authorizes Rule. A seasoning approach would promulgate and review such rules, the Bureau to prescribe regulations that create an alternative pathway to QM orders, and guidelines.’’ 105 Title X of revise, add to, or subtract from the safe harbor status for certain mortgages the Dodd-Frank Act (including section criteria that define a QM upon a finding if the consumer has consistently made 1061), along with TILA and certain that such regulations are necessary or timely payments for a specified period subtitles and provisions of title XIV of proper to ensure that responsible, of time. The Bureau in the near future the Dodd-Frank Act, are Federal affordable mortgage credit remains will issue a separate proposal that consumer financial laws.106 available to consumers in a manner addresses adding such an approach to consistent with the purposes of TILA the ATR/QM Rule. 105 12 U.S.C. 5581(a)(1)(A). section 129C; or are necessary and 106 Dodd-Frank Act section 1002(14), 12 U.S.C. appropriate to effectuate the purposes of 3. Other Temporary GSE QM Loan 5481(14) (defining ‘‘Federal consumer financial Issues law’’ to include the ‘‘enumerated consumer laws’’ 107 and the provisions of title X of the Dodd-Frank Act), 15 U.S.C. 1604(a). As discussed in the ANPR, absent any Dodd-Frank Act section 1002(12)(O), 12 U.S.C. 108 15 U.S.C. 1601(a). changes, the Temporary GSE QM loan 5481(12)(O) (defining ‘‘enumerated consumer laws’’ 109 15 U.S.C. 1639b(a)(2). definition will remain in effect until to include TILA). 110 15 U.S.C. 1639c(b)(2)(A).

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TILA sections 129B and 129C, to fees. Although the proposal would overlap with some elements of the prevent circumvention or evasion remove the 43 percent DTI limit from general ATR standard, including thereof, or to facilitate compliance with the General QM loan definition, the prohibiting ‘‘no-doc’’ loans where the such sections.111 In addition, TILA proposal would require that the creditor creditor does not verify income or section 129C(b)(3)(A) directs the Bureau consider and verify the consumer’s assets. TILA does not require DTI ratios to prescribe regulations to carry out the current or reasonably expected income to be included in the definition of a QM. purposes of section 129C.112 As or assets other than the value of the Rather, the statute authorizes, but does discussed in the section-by-section dwelling (including any real property not require, the Bureau to establish analysis below, the Bureau is proposing attached to the dwelling) that secures additional criteria relating to monthly to issue certain provisions of this the loan and the consumer’s current DTI ratios, or alternative measures of proposed rule pursuant to its authority debt obligations, alimony, and child ability to pay regular expenses after under TILA section 129C(b)(3)(B)(i). support. The proposal would remove payment of total monthly debt, taking appendix Q. To prevent uncertainty that into account the income levels of the B. Dodd-Frank Act may result from appendix Q’s removal, consumer and other factors the Bureau Dodd-Frank Act section 1022(b). the proposal would clarify the determines relevant and consistent with Section 1022(b)(1) of the Dodd-Frank requirements to consider and verify a the purposes described in TILA section Act authorizes the Bureau to prescribe consumer’s income, assets, debt 129C(b)(3)(B)(i). rules to enable the Bureau to administer obligations, alimony, and child support. The Board’s 2011 ATR/QM Proposal. and carry out the purposes and The proposal would preserve the In the 2011 ATR/QM Proposal, the objectives of the Federal consumer current threshold separating safe harbor Board proposed two alternative financial laws, and to prevent evasions from rebuttable presumption QMs, approaches to the General QM loan thereof.113 TILA and title X of the Dodd- under which a loan is a safe harbor QM definition to implement the statutory Frank Act are Federal consumer if its APR exceeds APOR for a QM requirements.114 The proposed financial laws. Accordingly, the Bureau comparable transaction by less than 1.5 alternatives differed in the extent to is proposing to exercise its authority percentage points as of the date the which, in addition to the statutory QM under Dodd-Frank Act section 1022(b) interest rate is set (or by less than 3.5 requirements, they included factors to prescribe rules that carry out the percentage points for subordinate-lien from the ATR standard, including purposes and objectives of TILA and transactions). consideration of the consumer’s title X and prevent evasion of those The Bureau is proposing a price-based monthly DTI ratio. laws. approach to replace the specific DTI Alternative 1 under the Board’s limit because it is concerned that proposal would have included only the V. Why the Bureau Is Issuing This imposing a DTI limit as a condition for statutory QM requirements and would Proposal QM status under the General QM loan not have incorporated the consumer’s The Bureau is issuing this proposal to definition may be overly burdensome DTI ratio, residual income, or other amend the General QM loan definition and complex in practice and may factors from the general ATR because it is concerned that retaining unduly restrict access to credit because standard.115 Among the reasons the the existing General QM loan definition it provides an incomplete picture of the Board cited in support of proposed with the 43 percent DTI limit after the consumer’s financial capacity. In Alternative 1 was a concern that DTI Temporary GSE QM loan definition particular, the Bureau is concerned that ratios (and residual income) are not expires would significantly reduce the conditioning QM status on a specific objective and would not provide size of QM and could significantly DTI limit may impair access to credit for certainty that a loan is in fact a QM.116 reduce access to responsible, affordable some consumers for whom it might be The Board also cited data showing that credit. The Bureau is proposing a price- appropriate to presume ability to repay a consumer’s DTI ratio generally does based General QM loan definition to for their loans at consummation. For the not have a significant predictive power replace the DTI-based approach because reasons set forth below, the Bureau of loan performance, once the effects of it preliminarily concludes that a loan’s preliminarily concludes that a price- credit history, loan type, and loan-to- price, as measured by comparing a based General QM loan definition is value (LTV) ratio are considered.117 The loan’s APR to APOR for a comparable appropriate because a loan’s price, as Board was also concerned that the transaction, is a strong indicator of a measured by comparing a loan’s APR to benefit of including DTI ratio (or consumer’s ability to repay and is a APOR for a comparable transaction, is a residual income) requirements in the more holistic and flexible measure of a strong indicator of a consumer’s ability definition of QM may not outweigh the consumer’s ability to repay than DTI to repay and is a more holistic and risk of reduced credit availability for alone. flexible measure of a consumer’s ability certain consumers who may not meet Under the proposal, a loan would to repay than DTI alone. widely accepted DTI ratio standards but meet the General QM loan definition in A. Overview of the General QM Loan may have other compensating factors, § 1026.43(e)(2) only if the APR exceeds Definition DTI Limit such as sufficient residual income or APOR for a comparable transaction by other resources, to be able to reasonably As discussed above, TILA section less than two percentage points as of the afford the mortgage.118 Proposed 129C(b)(2) defines QM by limiting date the interest rate is set. The proposal Alternative 1 would have provided certain loan terms and features. The would provide higher thresholds for creditors with a safe harbor to establish statute generally prohibits a QM from loans with smaller loan amounts and for compliance with the ATR requirements. permitting an increase of the principal subordinate-lien transactions. The Proposed Alternative 2 would have balance on the loan (negative proposal would retain the existing included the statutory QM requirements product-feature and underwriting amortization), interest-only payments, requirements and limits on points and most balloon payments, a term greater 114 76 FR 27390, 27453 (May 11, 2011). than 30 years, and points and fees that 115 Id. at 27453. 111 15 U.S.C. 1639c(b)(3)(B)(i). exceed a specified threshold. In 116 Id. at 27454. 112 15 U.S.C. 1639c(b)(3)(A). addition, the statute incorporates 117 Id. 113 12 U.S.C. 5512(b)(1). limited underwriting criteria that 118 Id.

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and additional factors from the general § 1026.43(e)(2)(vi). In adopting this processes for both governmental ATR standard, including a requirement approach, the Bureau explained that it programs and private lenders.136 to consider and verify the consumer’s believed the QM criteria should include To provide certainty for creditors DTI ratio or residual income.119 The a standard for evaluating the consumer’s regarding the loan’s QM status, the Board expressed concern that, absent a ability to repay, in addition to the January 2013 Final Rule contained a DTI ratio or residual income product feature restrictions and other specific DTI limit of 43 percent as part requirement, a creditor could originate a requirements that are specified in of the General QM loan definition. The QM without considering the effect of the TILA.128 The Bureau stated that the Bureau stated that a specific DTI limit new loan payment on the consumer’s TILA ATR/QM provisions are also provides certainty to assignees and overall financial picture.120 The Board fundamentally about assuring that the investors in the secondary market, did not propose a specific limit for the mortgage loan that consumers receive is which the Bureau believed would help DTI ratio in the QM definition as part affordable, and that the protection from reduce concerns regarding legal risk and of Alternative 2.121 The Board cited liability afforded to QMs would not be promote credit availability.137 The several reasons for not proposing a reasonable if the creditor made the loan Bureau noted that numerous specific DTI limit. First, the Board was without considering and verifying commenters had highlighted the value concerned that setting a specific DTI certain core aspects of the consumer’s of providing objective requirements ratio threshold could limit credit financial picture.129 determined based on information availability without providing adequate With respect to DTI, the Bureau noted contained in loan files.138 To that end, off-setting benefits.122 Second, outreach that DTI ratios are widely used for the Bureau provided definitions of debt conducted by the Board revealed a range evaluating a consumer’s ability to repay and income for purposes of the General of underwriting guidelines for DTI ratios over time because, as the available data QM loan definition in appendix Q, to based on product type, whether showed, DTI ratio correlates with loan address concerns that creditors may not creditors used manual or automated performance as measured by have adequate certainty about whether a underwriting, and special delinquency rate.130 The January 2013 particular loan satisfies the considerations for high- and low-income Final Rule noted that, at a basic level, requirements of the General QM loan consumers.123 The Board was concerned the lower the DTI ratio, the greater the definition.139 that setting a specific limit would consumer’s ability to pay back a The Bureau selected 43 percent as the require addressing the operational mortgage loan.131 The Bureau believed DTI limit for the General QM loan issues related to the calculation of the this relationship between the DTI ratio definition because, based on analysis of DTI ratio, including defining debt and and the consumer’s ability to repay data available at the time and income.124 The Board was also applied both under conditions as they comments, the Bureau believed that the concerned that a specific limit would exist at consummation, as well as under 43 percent limit would advance TILA’s require tolerance provisions to account future changed circumstances, such as goals of creditors not extending credit for mistakes made in calculating the DTI increases in payments for adjustable- that consumers cannot repay while still ratio.125 At the same time, the Board rate mortgages (ARMs), future preserving consumers’ access to recognized that creditors and consumers reductions in income, and credit.140 The Bureau acknowledged may benefit from a higher degree of unanticipated expenses and new that there is no specific threshold that certainty surrounding the QM debts.132 The Bureau’s findings separates affordable from unaffordable definition.126 Therefore, the Board regarding DTI ratios relied primarily on mortgages; rather, there is a gradual solicited comment on whether and how analysis of the FHFA’s Historical Loan increase in delinquency rates as DTI it should prescribe a specific limit for Performance (HLP) dataset, data ratios increase.141 Additionally, the the DTI ratio or residual income for the provided by FHA, and data provided by Bureau noted that a 43 percent DTI ratio QM definition.127 The Board’s commenters.133 The Bureau believed was within the range used by many Alternative 2 would have provided a these data indicated that DTI ratios creditors, generally comported with rebuttable presumption of compliance correlate with loan performance, as industry standards and practices for with the ATR requirements. measured by delinquency rate (where prudent underwriting, and was the The Bureau’s January 2013 Final delinquency is defined as being over 60 threshold used by FHA as its general Rule. The Bureau’s January 2013 Final days late), in any credit cycle.134 Within boundary at the time the Bureau issued Rule included the statutory QM factors a typical range of DTI ratios creditors the January 2013 Final Rule.142 The and additional factors from the general use in underwriting (e.g., under 32 Bureau noted concerns about setting a ATR standard in the General QM loan percent DTI to 46 percent DTI), the higher DTI limit, including concerns definition in § 1026.43(e)(2). However, Bureau noted that generally, there is a that it could allow QM status for instead of incorporating the approach to gradual increase in delinquency with mortgages for which there is not a sound DTI from the ATR standard, which higher DTI ratio.135 The Bureau also reason to presume that the creditor had requires a creditor to consider the noted that DTI ratios are widely used as a reasonable belief in the consumer’s consumer’s DTI ratio or residual an important part of the underwriting ability to repay.143 The Bureau was income, the Bureau prescribed for the especially concerned about this in the General QM loan definition a specific 128 78 FR 6408, 6516 (Jan. 30, 2013). context of QMs that receive a safe DTI limit of 43 percent in 129 Id. at 6516. harbor from the ATR requirements.144 130 Id. at 6526–27. 131 Id. at 6526. 119 Id. 136 Id. 132 Id. at 6526–27. 120 Id. at 27455. 137 Id. 133 Id. at 6527. 121 Id. at 27460. 138 Id. 134 Id. 122 Id. 139 Id. 135 Id. (citing 77 FR 33120, 33122–23 (June 5, 123 Id. at 27461. 140 Id. 2012) (Table 2: Ever 60+ Delinquency Rates, 124 141 Id. summarizing the HLP dataset by volume of loans Id. 125 Id. and percentage that were ever 60 days or more 142 Id. 126 Id. delinquent, tabulated by the total DTI on the loans 143 Id. at 6528. 127 Id. and year of origination)). 144 Id.

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The Bureau was also concerned that a credit given market conditions at the with strict verification rules. The higher DTI limit would result in a QM time the rule was issued. Among other current approach to DTI ratios under the boundary that substantially covered the things, the Bureau expressed concern General QM loan definition may entire mortgage market. If that were the that, as the mortgage market recovered constrain new approaches to assessing case, creditors might be unwilling to from the financial crisis, there would be repayment ability, including the use of make non-QM loans, and the Bureau a limited non-QM market, which, in technology as part of the underwriting was concerned that the QM rule would conjunction with the 43 percent DTI process. Such innovations include define the limit of credit availability.145 limit, could impair access to credit for certain new uses of cash flow data and The Bureau also suggested that a higher consumers with DTI ratios over 43 analytics to underwrite mortgage DTI limit might require a corresponding percent.153 To preserve access to credit applicants. This emerging technology weakening of the strength of the for such consumers while the market has the potential to accurately assess presumption of compliance, which the recovered, the Bureau adopted the consumers’ ability to repay using, for Bureau believed would largely defeat Temporary GSE QM loan definition, example, bank account data that can the point of adopting a higher DTI which did not include a specific DTI identify the source and frequency of limit.146 limit. As discussed below, the recurring deposits and payments and Despite the Bureau’s inclusion of a Temporary GSE QM loan definition identify remaining disposable income. specific DTI limit in the General QM continues to play a significant role in Identifying the remaining disposable loan definition, the Bureau also ensuring access to credit for consumers. income could be a method of assessing the consumer’s residual income and acknowledged concerns about the B. Considerations Related to the General could potentially satisfy a requirement requirement. The Bureau acknowledged QM Loan Definition DTI Limit that the Board, in issuing the 2011 ATR/ to consider either DTI or residual QM Proposal, found that DTI ratios may The Bureau’s own experience and the income, absent a specific DTI limit. This not have significant predictive power, feedback it has received from innovation could potentially expand once the effects of credit history, loan stakeholders since issuing the January access to responsible, affordable type, and LTV ratio are considered.147 2013 Final Rule suggest that imposing a mortgage credit, particularly for Similarly, the Bureau noted that some DTI limit as a condition for QM status applicants with non-traditional income commenters responding to the 2011 under the General QM loan definition and limited credit history. The potential ATR/QM Proposal suggested that the may be overly burdensome and complex negative effect of the rule on innovation Bureau should include compensating in practice and may unduly restrict in underwriting may be heightened access to credit because it provides an factors in addition to a specific DTI ratio while the market is largely concentrated incomplete picture of the consumer’s threshold due to concerns about in the QM lending space and may limit financial capacity. While the Bureau restricting access to credit.148 The access to credit for some consumers acknowledges that DTI ratios generally Bureau acknowledged that a standard with DTI ratios above 43 percent. correlate with loan performance, as the that takes into account multiple factors The Bureau’s 2019 ATR/QM Bureau found in the January 2013 Final may produce more accurate ability-to- Assessment Report highlights the Rule and as shown in recent Bureau repay determinations, at least in specific tradeoffs of conditioning the General analysis described below, the Bureau cases, but was concerned that QM loan definition on a DTI limit. The also notes that a consumer’s DTI ratio is incorporating a multi-factor test or Assessment Report included specific only one way to measure financial compensating factors into the QM findings about the General QM loan capacity and is not a holistic measure of definition’s DTI limit, including certain definition would undermine the the consumer’s ability to repay. certainty for creditors and the secondary findings related to DTI ratios as In particular, the Bureau is concerned probative of a consumer’s ability to market of whether loans were eligible that imposing a DTI limit as a condition 149 repay. The Assessment Report found for QM status. The Bureau also for QM status under the General QM acknowledged arguments that residual that loans with higher DTI ratios have loan definition may deny QM status for been associated with higher levels of income—generally defined as the loans to some consumers for whom it monthly income that remains after a ‘‘early delinquency’’ (i.e., delinquency might be appropriate to presume ability within two years of origination), which, consumer pays all personal debts and to repay at consummation, and that obligations, including the prospective as explained below, may serve as a denying QM status to such loans risks proxy for measuring whether a mortgage—may be a better measure of denying consumers access to 150 consumer had a reasonable ability to repayment ability. However, the responsible, affordable credit. Bureau noted that it lacked sufficient repay at the time the loan was Numerous stakeholders, including consummated.154 For example, the data to mandate a bright-line rule based commenters responding to the ANPR, 151 Assessment Report notes that for all on residual income. The Bureau have argued that the current approach to anticipated further study of the issue as periods and samples studied, a positive DTI ratios as part of the General QM relationship between DTI ratios and part of the five-year assessment of the loan definition is not appropriate rule.152 early delinquency is present and because it creates problems for some economically meaningful.155 The The Bureau acknowledged in the consumers’ ability to access credit when January 2013 Final Rule that the 43 Assessment Report states that higher their DTI ratio is above a bright-line DTI ratios independently increase percent DTI limit in the General QM threshold. These access to credit loan definition could restrict access to expected early delinquency, regardless concerns are especially acute for lower- of other underwriting criteria.156 income and minority consumers. 145 At the same time, findings from the Id. The Bureau acknowledges that the 146 Assessment Report indicate that the Id. current approach to DTI ratios under the 147 Id. at 6527. specific 43 percent DTI limit in the 148 Id. General QM loan definition may also 149 Id. stifle innovation in underwriting 154 See Assessment Report, supra note 58, at 83– 150 Id. at 6528. because it focuses on a single metric, 84, 100–05. 151 Id. 155 Assessment Report at 104–05. 152 Id. 153 Id. at 6533. 156 Id. at 105.

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current rule has restricted access to Final Rule that it believed mortgages appendix Q have proven to be complex credit, particularly in the absence of a that could be responsibly originated in practice, and, as discussed below, the robust non-QM market. The report with DTI ratios that exceed 43 percent, Bureau has concerns about other found that, for high-DTI consumers— which historically includes over 20 potential approaches to defining debt i.e., consumers with DTI ratios above 43 percent of mortgages, would be made and income in connection with percent—who qualify for loans eligible under the general ATR standard.160 conditioning QM status on a specific for purchase or guarantee by the GSEs, However, the Assessment Report found DTI limit. the Rule has not decreased access to that a robust market for non-QM loans At the time of the January 2013 Final credit.157 However, the Assessment above the 43 percent DTI limit has not Rule, the Bureau sought to provide a Report attributes the fact that the 43 materialized as the Bureau had period for economic, market, and percent DTI limit has not reduced predicted. Therefore, there is limited access to credit for such consumers to capacity in the non-QM market to regulatory conditions to stabilize and for the existence of the Temporary GSE QM provide access to credit after the a reasonable transition period to the loan definition. The findings in the expiration of the Temporary GSE QM General QM loan definition and non- Assessment Report indicate that there loan definition.161 As described above, QM loans above a 43 percent DTI ratio. would be some reduction in access to the non-QM market has been further However, contrary to the Bureau’s credit for high-DTI consumers when the reduced by the recent economic expectations, lending largely has Temporary GSE QM loan definition disruptions associated with the COVID– remained in the Temporary GSE QM expires, absent changes to the General 19 pandemic, with most mortgage credit loan space, and a robust and sizable QM loan definition. For example, based now available in the QM lending space. market to support non-QM lending has on application-level data obtained from The Bureau acknowledges that the slow not yet emerged.164 As noted above, the nine large lenders, the Assessment development of the non-QM market, Bureau acknowledges that the recent Report found that the January 2013 and the recent economic disruptions economic disruptions associated with Final Rule eliminated between 63 and associated with the COVID–19 the COVID–19 pandemic may further 70 percent of non-GSE eligible, high-DTI pandemic that may significantly hinder hinder development of the non-QM home purchase loans.158 The Bureau is its development in the near term, may market, at least in the near term. The concerned about a similar effect for further reduce access to credit outside Bureau expects that a significant loans with DTI ratios above 43 percent the QM space. number of Temporary GSE QM loans when the Temporary GSE QM loan The Bureau also has particular would not qualify as General QM loans definition expires. The Bureau concerns about the effects of the under the current rule after the acknowledges that the Assessment appendix Q definitions of debt and Temporary GSE QM loan definition Report’s finding, without other income on access to credit. The Bureau expires, either because they have DTI information, does not prove or disprove intended for appendix Q to provide ratios above 43 percent or because their the effectiveness of the DTI limit in creditors with certainty about the DTI method of documenting and verifying achieving the purposes of the January ratio calculation to foster compliance income or debt is incompatible with 2013 Final Rule in ensuring consumers’ with the General QM loan definition. appendix Q. Although alternative loan ability to repay the loan. If the denied However, based on extensive options would still be available to many stakeholder feedback and its own applicants in fact lacked the ability to consumers after expiration of the experience, the Bureau recognizes that repay, then the reduction in approval Temporary GSE QM loan definition, the appendix Q’s definitions of debt and rates is an appropriate consequence of Bureau anticipates that, with respect to income are rigid and difficult to apply the Rule. However, if the denied loans that are currently Temporary GSE and do not provide the level of applicants did have the ability to repay, QM loans and would not otherwise compliance certainty that the Bureau then these data suggest an unintended qualify as General QM loans under the anticipated. Stakeholders have reported consequence of the Rule. This current definition, some would cost possibility is supported by the fact that that these concerns are particularly acute for transactions involving self- materially more for consumers and other findings in the Assessment Report some would not be made at all. suggest that applicants for high-DTI employed consumers, consumers with Specifically, the Bureau’s Dodd-Frank ratio, non-GSE eligible loans are being part-time employment, and consumers Act 1022(b) Analysis, below, estimates denied, even though other with irregular or unusual income that, as a result of the General QM loan compensating factors indicate that some streams. The standards in appendix Q definition’s 43 percent DTI limit, of them may have the ability to repay could negatively impact access to credit approximately 957,000 loans—16 their loans.159 for these consumers, particularly after The current state of the non-QM expiration of the Temporary GSE QM percent of all closed-end first-lien market heightens the access to credit loan definition. The Assessment Report residential mortgage originations in concerns related to the specific 43 also noted concerns with the perceived 2018—would be affected by the percent DTI limit, particularly if such lack of clarity in appendix Q and found expiration of the Temporary GSE QM 165 conditions persist after the expiration of that such concerns ‘‘may have loan definition. An additional, the Temporary GSE QM loan definition. contributed to investors’—and at least smaller number of loans that currently The Bureau stated in the January 2013 derivatively, creditors’—preference’’ for qualify as Temporary GSE QM loans Temporary GSE QM loans.162 Appendix may not fall within the General QM loan 157 See, e.g., id. at 10, 194–96. Q, unlike other standards for calculating definition after expiration of the 158 See, e.g., id. at 10–11, 117, 131–47. and verifying debt and income, has not Temporary GSE QM loan definition 159 See, e.g., Assessment Report supra note 58, at been revised since 2013.163 The current because the method used for verifying 150, 153, Table 20. Table 20 illustrates how the definitions of debt and income in income or debt would not comply with pool of denied non-GSE eligible high-DTI applicants has changed between 2013 and 2014. 160 After the introduction of the Rule, the pool of 78 FR 6408, 6527 (Jan. 30, 2013). 164 Id. at 198. denied applicants contains more consumers with 161 Assessment Report, supra note 58, at 198. 165 Dodd-Frank Act section 1022(b) (analysis cites higher incomes, higher FICO scores, and higher 162 Id. at 193. the Bureau’s prior estimate of affected loans in the down payments. 163 Id. at 193–94. ANPR); see 84 FR 37155, 37159 (July 31, 2019).

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appendix Q.166 The Temporary GSE QM consumers offered FHA loans may the Assessment Report found that the loan definition is currently set to expire choose not to take out a mortgage January 2013 Final Rule eliminated upon the earlier of January 10, 2021 or because of these higher costs. between 63 and 70 percent of non-GSE when GSE conservatorship ends, and It is also possible that some eligible, high-DTI home purchase the Bureau believes that many loans consumers with DTI ratios above 43 loans.180 currently originated under the percent would be able to obtain loans in In the separate Extension Proposal, Temporary GSE QM loan definition may the private market.172 The ANPR noted the Bureau is proposing to replace the cost materially more or may not be that the number of loans absorbed by January 10, 2021 sunset date with a made at all, absent changes to the the private market would likely depend, provision that would amend the General QM loan definition. After the in part, on whether actors in the private Temporary GSE QM loan definition so Temporary GSE QM loan definition market are willing to assume the legal that it would expire upon the earlier of expires, the Bureau expects that many or credit risk associated with funding— the effective date of final amendments consumers with DTI ratios above 43 as non-QM loans or small-creditor to the General QM loan definition, or percent who would have received a portfolio QM loans—loans that would when GSE conservatorship ends.181 The Temporary GSE QM loan would instead have been Temporary GSE QM loans Bureau is issuing that separate proposal obtain FHA-insured loans since FHA (with DTI ratios above 43 percent) 173 to ensure that responsible, affordable currently insures loans with DTI ratios and, if so, whether actors in the private credit remains available to consumers up to 57 percent.167 The number of market would offer more competitive who may be affected if the Temporary loans that move to FHA would depend pricing or terms.174 For example, the GSE QM loan definition expires before on FHA’s willingness and ability to Bureau estimates that 55 percent of amendments to the General QM loan insure such loans, whether FHA loans that would have been Temporary definition take effect. continues to treat all loans that it GSE QM loans (with DTI ratios above 43 insures as QMs under its own QM rule, percent) in 2018 had credit scores at or C. Why the Bureau Is Proposing a Price- and how many loans that would have above 680 and LTV ratios at or below 80 Based QM Definition To Replace the been originated as Temporary GSE QM percent—credit characteristics General QM Loan Definition DTI Limit loans with DTI ratios above 43 percent traditionally considered attractive to Given the significant issues associated exceed FHA’s loan-amount limit.168 For actors in the private market.175 The with the 43 percent DTI limit, the example, the Bureau estimates that, in ANPR also noted that there are certain Bureau is proposing to remove that 2018, 11 percent of Temporary GSE QM built-in costs to FHA loans—namely, requirement from the General QM loan loans with DTI ratios above 43 percent mortgage insurance premiums—which definition in § 1026.43(e)(2)(vi) and exceeded FHA’s loan-amount limit.169 could be a basis for competition, and replace it with a requirement based on Thus, the Bureau considers that at most that depository institutions in recent the price of the loan. Specifically, in 89 percent of loans that would have years have shied away from originating addition to the statutory product been Temporary GSE QM loans with and servicing FHA loans due to the features and underwriting restrictions DTI ratios above 43 percent could move obligations and risks associated with that apply under the current rule, a loan to FHA.170 The Bureau expects that such loans.176 At the same time, the would meet the General QM loan loans that are originated as FHA loans Assessment Report found there has been definition only if the APR exceeds instead of under the Temporary GSE limited momentum toward a greater role APOR for a comparable transaction by QM loan definition generally would cost for private market non-QM loans. It is less than two percentage points as of the materially more for many consumers.171 uncertain how great this role will be in date the interest rate is set. The proposal The Bureau expects that some the future,177 particularly in the short would provide higher thresholds for term due to the economic effects of the loans with smaller loan amounts and for 166 Id. at 37159 n.58. COVID–19 pandemic. Finally, the ANPR subordinate-lien transactions. Although 167 In fiscal year 2019, approximately 57 percent noted that some consumers with DTI the proposal would remove the 43 of FHA-insured purchase mortgages had a DTI ratio ratios above 43 percent who would have above 43 percent. U.S. Dep’t of Hous. & Urban Dev., percent DTI limit from the General QM Annual Report to Congress Regarding the Financial sought Temporary GSE QM loans may loan definition, it would require that the Status of the FHA Mutual Mortgage Insurance adapt to changing options and make creditor: (1) Consider the consumer’s Fund, Fiscal Year 2019, at 33 using data from App. different choices, such as adjusting their income or assets, debt obligations, B Tabl. B9 (Nov. 14, 2018), https://www.hud.gov/ borrowing to result in a lower DTI sites/dfiles/Housing/documents/ alimony, and child support, and 178 2019FHAAnnualReportMMIFund.pdf. ratio. However, some consumers who monthly DTI ratio or residual income, 168 84 FR 37155, 37159 (July 31, 2019). would have sought Temporary GSE QM and (2) verify the consumer’s current or 169 Id. In 2018, FHA’s county-level maximum loans (with DTI ratios above 43 percent) reasonably expected income or assets loan limits ranged from $294,515 to $679,650 in the may not obtain loans at all.179 For continental United States. See U.S. Dep’t of Hous. other than the value of the dwelling & Urban Dev., FHA Mortgage Limits, https:// example, based on application-level (including any real property attached to entp.hud.gov/idapp/html/hicostlook.cfm (last data obtained from nine large lenders, the dwelling) that secures the loan and visited June 21, 2020). the consumer’s current debt obligations, 170 84 FR 37155, 37159 (July 31, 2019). 172 84 FR 37155, 37159 (July 31, 2019). alimony, and child support. The 171 Interest rates and insurance premiums on FHA 173 See 12 CFR 1026.43(e)(5) (extending QM loans generally feature less risk-based pricing than status to certain portfolio loans originated by proposal would remove appendix Q but conventional loans, charging more similar rates and certain small creditors). In addition, section 101 of would clarify the requirements to premiums to all consumers. As a result, they are the Economic Growth, Regulatory Relief, and consider and verify a consumer’s likely to cost more than conventional loans for Consumer Protection Act, Public Law 115–174, 132 consumers with stronger credit scores and larger Stat. 1296 (2018), amended TILA to add a safe 180 down payments. Consistent with this pricing harbor for small creditor portfolio loans. See 15 See Assessment Report supra note 58, at 10– differential, consumers with higher credit scores U.S.C. 1639c(b)(2)(F). 11, 117, 131–47. 181 and larger down payments chose FHA loans 174 84 FR 37155, 37159 (July 31, 2019). As the Bureau notes in the separate Extension Proposal, the Bureau does not intend for the relatively rarely in 2018 HMDA data on mortgage 175 Id. effective date of final amendments to the General originations. See Bureau of Consumer Fin. Prot., 176 Introducing New and Revised Data Points in Id. QM loan definition to be prior to April 1, 2021. HMDA, August 2019, https:// 177 Id. Thus, the Bureau does not intend for the Temporary files.consumerfinance.gov/f/documents/cfpb_new- 178 Id. GSE QM loan definition to expire prior to April 1, revised-data-points-in-hmda_report.pdf. 179 Id. 2021.

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income, assets, debt obligations, correlated with loan performance, based appropriate measure of whether a loan alimony, and child support, to help on early delinquency rates, across a should be presumed to comply with the prevent compliance uncertainty that variety of loans and economic ATR provisions. Because the could otherwise result from the removal conditions. However, the Bureau affordability of a given mortgage will of appendix Q. Consistent with the acknowledges that DTI is also predictive vary from consumer to consumer based current rule, the proposal would of loan performance and that other upon a range of factors, there is no preserve the current threshold direct and indirect measures of single recognized metric, or set of separating safe harbor from rebuttable consumer finances may also be metrics, that can directly measure presumption QMs, under which a loan predictive of loan performance. The whether the terms of mortgage loans are is a safe harbor QM if its APR exceeds Bureau does not make a finding here on reasonably within consumers’ ability to APOR for a comparable transaction by whether or to what extent one measure repay.185 As such, consistent with the less than 1.5 percentage points as of the clearly outperforms others in predicting Bureau’s prior analyses in the date the interest rate is set.182 loan performance. Rather, the Bureau Assessment Report, the Bureau uses The Bureau acknowledges there is has weighed several policy early distress as a proxy for the lack of significant debate over whether loan considerations in selecting an approach the consumer’s ability to repay at pricing, a consumer’s DTI ratio, or for the proposal based on the purposes consummation across a wide pool of another direct or indirect measure of a of the ATR/QM provisions of TILA. loans. Consistent with the Assessment consumer’s personal finances is a better In particular, the Bureau has balanced Report, for the analyses of early predictor of loan performance, considerations related to ensuring delinquency rates below, the Bureau particularly when analyzed across consumers’ ability to repay and measures early distress as whether a various points in the economic cycle.183 maintaining access to credit in deciding consumer was ever 60 or more days past Some commenters responding to the to seek comment on replacing the due within the first 2 years after ANPR advocated for retaining a DTI current 43 percent DTI limit with a origination (referred to herein as the requirement as part of the General QM price-based approach. The Bureau early delinquency rate).186 The Bureau’s loan definition, arguing that it is a continues to view the statute as analysis focuses on early delinquency strong indicator of a consumer’s ability fundamentally about assuring that rates to capture consumers’ difficulties to repay. Other commenters suggested a consumers receive mortgage credit that in making payments soon after range of options to replace the current they are able to repay. However, the consummation of the loan (i.e., within DTI requirement in the General QM loan Bureau is also concerned about the first 2 years), even if these definition, including by prescribing a maintaining access to responsible, delinquencies do not lead to consumers residual income test; allowing affordable mortgage credit. The Bureau potentially losing their homes (i.e., 60 or compensating factors (such as LTV is concerned that the current General more days past due, as opposed to 90 or ratios and credit scores) in conjunction QM loan definition, with a 43 percent more days or in foreclosure), as early with a DTI ratio; and defining QM by DTI limit, would result in a significant difficulties in making payments reference to widely used underwriting reduction in the scope of QM and could indicates higher likelihood that the standards. In seeking comments on this reduce access to responsible, affordable consumer may have lacked ability to proposal, the Bureau is not determining mortgage credit after the Temporary repay at consummation. As in the whether DTI ratios, a loan’s price, or GSE QM loan definition expires. The Assessment Report, the Bureau assumes lack of a robust non-QM market some other measure is the best predictor that the average early delinquency rate enhances those concerns. Although the of loan performance. As discussed across a wide pool of mortgages— Bureau noted in the January 2013 Final below, analysis provided by whether safe harbor QM, rebuttable Rule that it expected access to credit stakeholders and the Bureau’s own presumption QM, or non-QM—is outside of the QM lending space to analysis show that pricing is strongly probative of whether such loans are develop over time, the Assessment reasonably within consumers’ Report found that a robust and sizable 182 The current rule provides a higher safe harbor repayment ability, and that the threshold of 3.5 percentage points over APOR for market to support non-QM lending has dependence of these early delinquency small creditor portfolio QMs and balloon-payment not emerged since the Rule took rates on the defining characteristics of QMs made by certain small creditors pursuant to effect.184 The Bureau also acknowledges such loans is probative of how those § 1026.43(e)(5), (e)(6) and (f). See § 1026.43(b)(4). that the non-QM market has been This proposal would not alter those thresholds. characteristics may influence repayment 183 See, e.g., Norbert Michel, The Best Housing further reduced by the recent economic ability. The Bureau acknowledges that Finance Reform Options for the Trump disruptions associated with the COVID– alternative measures of delinquency, Administration, Forbes (July 15, 2019), https:// 19 pandemic, with most mortgage credit including those used in analyses www.forbes.com/sites/norbertmichel/2019/07/15/ now available in the QM lending space. submitted as comments on the ANPR, the-best-housing-finance-reform-options-for-the- trump-administration/#4f5640de7d3f; Eric Kaplan Although it remains possible that, over may also be probative of repayment et al., Milken Institute, A Blueprint for time, a substantial market for non-QM ability. Administrative Reform of the Housing Finance loans will emerge, that market has The Bureau has reviewed the System, at 17 (Jan. 2019), https:// developed slowly, and the recent available evidence to assess whether assets1b.milkeninstitute.org/assets/Publication/ economic disruptions associated with rate spreads can distinguish loans that Viewpoint/PDF/Blueprint-Admin-Reform-HF- System-1.7.2019-v2.pdf (suggesting that the Bureau the COVID–19 pandemic may are likely to have low early delinquency both (1) expand the 43 percent DTI limit to 45 significantly hinder its development, at rates—and thus may be presumed to percent to move market share of higher-DTI loans least in the near term. reasonably reflect the consumer’s ability from the GSEs and FHA to the non-agency market, With respect to ability to repay, the to repay—from loans that are likely to and (2) establish a residual income test to protect against the risk of higher DTI loans); Morris Davis Bureau has focused on analysis of early have higher rates of delinquency—for et al., A Quarter Century of Mortgage Risk (FHFA, delinquency rates to evaluate whether a which it would not be appropriate to Working Paper 19–02, 2019), https://www.fhfa.gov/ loan’s price, as measured by the spread presume the consumer’s ability to repay. PolicyProgramsResearch/Research/Pages/ of APR over APOR (herein referred to as The Bureau’s own analysis and recent wp1902.aspx (examining various loan characteristics and a summary measure of risk—the the loan’s rate spread), may be an stressed default rate—for predictiveness of loan 185 Id. at 83. performance). 184 Assessment Report, supra note 58, at 198. 186 Id.

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analyses published in response to the non-QM under the current rule. Table 1 2019) a large economic downturn. The Bureau’s ANPR and RFIs provide strong shows that early delinquency rates 2018 data are divided into wider bins evidence of increasing early increase consistently with rate spreads, (as compared to Table 1) to ensure delinquency rates with higher rate from a low of 2 percent among loans enough loans per bin. As with Table 1, spreads across a range of datasets, time with rate spreads below or near zero, up Table 2 shows that early delinquency periods, loan types, measures of rate to 14 percent for loans with rate spreads rates increase consistently with rate spread, and measures of delinquency. of 2.25 percentage points or more over spreads, from a low of 0.2 percent for The Bureau’s delinquency analysis uses APOR.190 The Bureau notes that this loans with rate spreads near APOR or data from the National Mortgage sample includes loans originated during below APOR, up to 4.2 percent for loans Database (NMDB),187 including a the peak of the housing boom and with rate spreads of 2 percentage points matched sample of NMDB and HMDA delinquencies that occurred during the or more over APOR.193 loans.188 As described below, analysis ensuing recession, contributing to the of these datasets shows that early high overall levels of early delinquency. TABLE 2—2018 ORIGINATIONS, EARLY delinquency rates rise with rate spread. DELINQUENCY RATE BY RATE SPREAD Table 1 shows early delinquency rates TABLE 1—2002–2008 ORIGINATIONS, for 2002–2008 first-lien purchase EARLY DELINQUENCY RATE BY RATE Early originations in the NMDB, with loans SPREAD Rate spread over APOR delinquency rate categorized according to their in percentage points (as of Dec. 2019) approximate rate spread. The Bureau (percent) Rate spread (interest rate Early analyzed 2002 through 2008 origination + PMI approximation— delinquency rate < 0 ...... 0.2 years because the relatively fixed PMMS191) in percentage points (percent) 0–0.49 ...... 0.2 private mortgage insurance (PMI) 0.50–0.99 ...... 0.6 pricing during these years allows for < 0 ...... 2 1.00–1.49 ...... 1.7 reliable approximation of this important 0–0.24 ...... 2 1.50–1.99 ...... 2.7 component of rate spreads.189 The 0.25–0.49 ...... 4 2.00 and above ...... 4.2 sample is restricted to loans without 0.50–0.74 ...... 5 product features that would make them 0.75–0.99 ...... 6 Given the specific DTI limit under the 1.00–1.24 ...... 8 current rule, the Bureau also analyzed 1.25–1.49 ...... 10 187 See Bureau of Consumer Fin. Prot., Sources the relationship between DTI ratios and 1.50–1.74 ...... 12 and Uses of Data at the Bureau of Consumer early delinquency for the same samples Financial Protection, at 55–56 (Sept. 2018), https:// 1.75–1.99 ...... 13 www.consumerfinance.gov/documents/6850/bcfp_ 2.00–2.24 ...... 14 of loans in Tables 3 and 4. The Bureau’s sources-uses-of-data.pdf. (The NMDB, jointly 2.25 and above ...... 14 analyses show that early delinquency developed by the FHFA and the Bureau, provides rates increase consistently with DTI de-identified loan characteristics and performance ratio in both samples. In the 2002–2008 information for a five percent sample of all Analysis of additional data, as mortgage originations from 1998 to the present, reflected in Table 2, also shows early sample, early delinquency rates increase supplemented by de-identified loan and borrower delinquency rates rising with rate from a low of 3 percent among loans characteristics from Federal administrative sources spread. Table 2 shows early with DTI ratios at or below 25 percent, and credit reporting data.) up to 9 percent for loans with DTI ratios 188 HMDA was originally enacted by Congress in delinquency statistics for 2018 NMDB 194 1975 and is implemented by Regulation C, 12 CFR first-lien purchase originations that have between 61 and 70 percent. In the part 1003. See Bureau of Consumer Fin. Prot., been matched to 2018 HMDA data, 2018 sample, early delinquency rates Mortgage data (HMDA), https:// enabling the Bureau to use actual rate increase from 0.4 percent among loans www.consumerfinance.gov/data-research/hmda/. HMDA requires many financial institutions to spreads over APOR rather than with DTI ratios at or below 25 percent, maintain, report, and publicly disclose loan-level approximated rate spreads in its up to 0.9 percent among loans with DTI information about mortgages. These data are housed analysis.192 As with the data reflected in ratios between 44 and 50.195 The here to help show whether lenders are serving the Table 1, loans with product features that difference in early delinquency rates housing needs of their communities; they give public officials information that helps them make would make them non-QM under the between loans with the highest and decisions and policies; and they shed light on current rule are excluded from Table 2. lowest DTI ratios is smaller than the lending patterns that could be discriminatory. The However, only delinquencies occurring difference in early delinquency rates public data are modified to protect applicant and through December 2019 are observed in between the highest and lowest rate borrower privacy. Table 2, meaning most loans are not 189 See Neil Bhutta and Benjamin J. Keys, Eyes spreads during both periods. For these Wide Shut? The Moral Hazard of Mortgage Insurers observed for a full two years after samples and bins of rate spread and DTI during the Housing Boom, NBER Working Paper origination. This more recent sample ratios, this pattern is consistent with a No. 24844, https://www.nber.org/papers/ provides insight into early delinquency stronger correlation between rate spread w24844.pdf. APOR is approximated with weekly Freddie Mac Primary Mortgage Market Survey rates under post-crisis lending and early delinquency than between (PMMS) data, retrieved from Fed. Reserve Bank of standards, and for an origination cohort DTI ratios and early delinquency. St. Louis, Fed. Reserve Econ. Data,; https:// that had not undergone (as of December fred.stlouisfed.org/, March 4, 2020. Each loan’s APR 193 Loans with rate spreads of 2 percentage points is approximated by the sum of the interest rate in 190 the NMDB data and an assumed PMI payment of Loans with rate spreads of 2.25 percentage or more are grouped in Tables 2 and 6 to ensure 0.32, 0.52, or 0.78 percentage points for loans with points or more are grouped in Tables 1 and 5 to sufficient sample size for reliable analysis of the LTVs above 80 but at or below 85, above 85 but at ensure sufficient sample size for reliable analysis of 2018 data. This grouping ensures that all cells or below 90, and above 90, respectively. These PMI the 2002–2008 data. This grouping ensures that all shown in Table 6 contain at least 500 loans. are based on standard industry rates during this cells shown in Table 5 contain at least 500 loans. 194 Fewer than 0.7 percent of loans have reported time period. The 30-year Fixed Rate PMMS average 191 Freddie Mac’s PMMS is the source of data DTI ratios over 70 percent in the 2002–2008 data. is used for fixed-rate loans with terms over 15 years, underlying APOR rate for most mortgages. See These loans are excluded from Tables 3 and 5 due and 15-year Fixed Rate PMMS is used for loans supra note 189 for additional details. to reliability concerns and to ensure that all cells with terms of 15 years or less. The 5/1-year 192 Where possible, the FHFA provided an shown in Table 5 contain at least 500 loans. Adjustable-Rate PMMS average is used (for anonymized match of HMDA loan identifiers for 195 Fewer than 0.5 percent of loans have reported available years) for ARMs with a first interest rate 2018 NMDB originations, allowing the Bureau to DTI ratios over 50 percent in the 2018 data. These reset occurring 5 or more years after origination, analyze more detailed HMDA loan characteristics loans are excluded from Tables 4 and 6 due to while the 1-year adjustable-rate PMMS average is (e.g., rate spread over APOR) for approximately half reliability concerns and to ensure that all cells used for all other ARMs. of 2018 NMDB originations. shown in Table 6 contain at least 500 loans.

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TABLE 3—2002–2008 ORIGINATIONS, TABLE 4—2018 ORIGINATIONS, EARLY with loans categorized according to both EARLY DELINQUENCY RATE BY DTI DELINQUENCY RATE BY DTI their DTI ratio and their approximate RATIO (PERCENTAGE) rate spread. For loans within a given Early DTI ratio range, those with higher rate Early DTI delinquency rate spreads consistently had higher early DTI delinquency rate (as of Dec. 2019) delinquency rates. Loans with low rate (percent) spreads had relatively low early 0–20 ...... 3 0–25 ...... 0.4 delinquency rates even at high DTI ratio 21–25 ...... 3 26–35 ...... 0.5 levels, as seen in the 2 percent early 26–30 ...... 4 36–43 ...... 0.7 delinquency rate for loans priced below 31–35 ...... 5 44–48 ...... 0.9 APOR but with DTI ratios of 46 to 48 36–40 ...... 6 49–50 ...... 0.9 percent, 51 to 60 percent, and 61 to 70 41–43 ...... 6 percent. However, the highest early 44–45 ...... 7 To further analyze the strengths of delinquency rates occurred for loans 46–48 ...... 7 DTI ratios and pricing in predicting with high rate spreads and high DTI 49–50 ...... 8 early delinquency rates, Tables 5 and 6 ratios, reaching 26 percent for loans 51–60 ...... 8 show the early delinquency rates of priced 2 to 2.24 percentage points above 61–70 ...... 9 these same samples categorized APOR with DTI ratios of 61 to 70 according to both their DTI ratios and percent. Across DTI bins, loans priced 2 their rate spreads. Table 5 shows early percentage points or more above APOR delinquency rates for 2002–2008 first- had early delinquency much higher lien purchase originations in the NMDB, than loans priced below APOR.

TABLE 5—2002–2008 ORIGINATIONS, EARLY DELINQUENCY RATE BY RATE SPREAD AND DTI RATIO

Rate spread (interest rate + PMI DTI DTI DTI DTI DTI DTI DTI DTI DTI DTI DTI approx.—PMMS) in percentage 0–20 21–25 26–30 31–35 36–40 41–43 44–45 46–48 49–50 51–60 61–70 points (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

<0 ...... 2 1 1 2 2 2 2 2 3 2 2 0–0.24 ...... 2 2 2 2 2 3 3 3 3 3 3 0.25–0.49 ...... 3 3 3 3 4 5 4 5 5 5 5 0.50–0.74 ...... 4 4 4 4 5 6 6 6 7 7 7 0.75–0.99 ...... 4 5 5 6 6 7 7 7 8 8 10 1.00–1.24 ...... 6 6 6 7 7 9 9 9 10 11 13 1.25–1.49 ...... 6 7 8 8 10 11 12 12 12 14 15 1.50–1.74 ...... 7 8 9 10 13 13 15 14 16 15 20 1.75–1.99 ...... 7 8 10 12 14 15 16 16 16 18 22 2.00–2.24 ...... 6 10 10 12 15 15 17 19 18 20 26 2.25 and above...... 7 9 10 13 15 16 16 18 19 20 25

Similarly, Table 6 shows average early delinquency rate for loans with higher given consumer. However, the 2018 delinquency statistics, with loans rate spreads over APOR matches the loans priced 2 percentage points or categorized according to both DTI and pattern shown in the data from Table 5. more above APOR also had early rate spread, for the sample of 2018 Overall early delinquency rates are delinquency rates much higher than NMDB first-lien purchase originations substantially lower, reflecting the loans priced below APOR. that have been matched to 2018 HMDA importance of economic conditions in data.196 For Table 6, the higher early the likelihood of delinquency for any

TABLE 6—2018 ORIGINATIONS, EARLY DELINQUENCY RATE BY RATE SPREAD AND DTI RATIO

DTI DTI DTI DTI Rate spread over APOR in percentage points 0–25 26–35 36–43 44–50 (%) (%) (%) (%)

< 0 ...... 0.1 0.1 0.2 0.3 0–0.49 ...... 0.2 0.1 0.3 0.3 0.50–0.99 ...... 0.1 0.4 0.8 0.8 1.00–1.49 ...... 1.0 1.4 1.5 2.3 1.50–1.99 ...... 3.2 2.5 2.3 2.00 and above ...... 4.4 3.9 4.2

The Bureau notes that the high samples, demonstrating that rate conditions and creditor practices. relative risk of early delinquency for spreads distinguish early delinquency Analyses published in response to the higher-priced loans holds across risk under a range of economic Bureau’s ANPR and RFIs are consistent

196 As in Tables 2 and 4, above, the 2018 data are are excluded, as well as loans with a DTI ratio at contained fewer than 500 loans in the matched divided into larger bins to ensure enough loans per or below 25 percent and rate spreads of 1.5 2018 NMDB–HMDA sample. bin. Loans with a DTI ratio greater than 50 percent percentage points and above, because these bins

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with the Bureau’s analysis showing that relationship between rate spread and credit scores, and cash reserves, that early delinquency rates rise consistently loan performance in Fannie Mae loan- might compensate for a higher DTI ratio with rate spread. For example, level performance data.201 and that might also be probative of a CoreLogic analyzes a set of 2018 HMDA Collectively, this evidence suggests consumer’s ability to repay. One of the conventional mortgage originations that higher rate spreads—including the primary criticisms of the current 43 merged to loan performance data specific measure of APR over APOR— percent DTI ratio is that it is too limited collected from mortgage servicers.197 are strongly correlated with early in assessing a consumer’s finances and, The CoreLogic analysis finds: (1) The delinquency rates. Given that early as such, may unduly restrict access to lowest delinquency rates among loans delinquency captures consumers’ credit for some consumers for whom it with rate spreads that are below APOR, difficulty making required payments, might be appropriate to presume ability and (2) increased early delinquency these rate spreads provide a proxy to repay at consummation. Therefore, a rates for each sequentially higher bin of measure for whether the terms of potential benefit of a price-based QM rate spreads up to two percentage mortgage loans reasonably reflect definition is that a mortgage loan’s price points. In assessing the CoreLogic consumers’ ability to repay at the time reflects credit risk based on many analysis, the Bureau notes that loans of origination. The Bureau factors, including DTI ratios, and may priced at or above two percentage points acknowledges that a test that combines be a more holistic measure of ability to over APOR in the 2018 HMDA data are rate spread and DTI may better predict repay than DTI ratios alone. Further, relatively rare and are early delinquency rates than either there is inherent flexibility for creditors disproportionately made for metric on its own. However, any rule in a rate-spread-based QM definition, manufactured housing and smaller loan with a specific DTI limit would need to which could facilitate innovation in amounts and therefore may not be well provide standards for calculating the underwriting, including emerging represented in mortgage servicing income that may be counted and the research into alternative mechanisms to datasets. However, these loans also have debt that must be counted so that assess a consumer’s ability to repay, relatively high rates of delinquency.198 creditors and investors can ensure with such as cash flow underwriting. CoreLogic finds a similar, but more reasonable certainty that they have Although the Bureau is proposing to variable, positive relationship between accurately calculated DTI within the remove the 43 percent DTI limit in rate spreads over APOR and specific DTI limit. As noted above and § 1026.43(e)(2)(vi), the Bureau continues delinquency in earlier cohorts (2010– discussed further below, the current to believe that DTI is an important factor 2017) of merged HMDA-CoreLogic definitions of debt and income in for creditors to consider in evaluating originations, a period in which rate appendix Q have proven to be complex consumers’ ability to repay. As spreads were only reported for loans in practice and may unduly restrict discussed further in the section-by- priced at least 1.5 percentage points access to credit. The Bureau has section analysis of § 1026.43(e)(2)(v), over APOR.199 concerns about whether other potential below, the Bureau is proposing to Further, using loan performance data approaches could define debt and require creditors to consider a from Black Knight, analyses by the income with sufficient clarify while at consumer’s DTI ratio or residual income Urban Institute show a comparable the same time providing flexibility to to satisfy the General QM loan positive relationship between rate accommodate new approaches to definition. spreads—measured there as the note verification and underwriting. As noted The Bureau also notes that there is rate over Freddie Mac’s Primary in part V.E below, the Bureau is significant precedent for using the price Mortgage Market Survey—and requesting comment on whether the rule of a mortgage loan to determine whether delinquency.200 The analysis finds that should retain a specific DTI limit and, to apply additional consumer the relationship holds across a range of if so, whether the Bureau’s proposed protections, in recognition of the lower loan types (conventional loans held in approach to verification of income and risk generally posed by lower-priced portfolio, in GSE securitizations, and in debt in § 1026.43(e)(2)(v) would provide mortgages. A price-based General QM private securitizations; FHA loans; VA a workable method for defining debt loan definition would be consistent loans) and years (1995–2018). and income for a specific DTI limit. Part with these existing provisions that Additional analyses by the Urban V.E below requests comment on provide greater protections to Institute show the same positive whether certain aspects of proposed consumers with more expensive loans. § 1026.43(e)(2)(v) could be applied to a For example, TILA and Regulation Z use 197 See Archana Pradhan & Pete Carroll, General QM loan definition that a loan’s APR in comparison to APOR Expiration of the CFPB’s Qualified Mortgage (QM) includes a specific DTI limit. and as one trigger for heightened GSE Patch—Part V, LogicCore Insights Blog, (Jan. In addition to strongly correlating consumer protections for certain ‘‘high- 13, 2020), https://www.corelogic.com/blog/2020/1/ 202 expiration-of-the-cfpbs-qualified-mortgage-qm-gse- with loan performance, the Bureau cost mortgages’’ pursuant to HOEPA. patch-part-v.aspx. Delinquency was measured as of tentatively concludes that a price-based Loans that meet HOEPA’s high-cost October 2019, so loans do not have two full years QM definition, rather than conditioning trigger are subject to special disclosure of payment history. QM status on a specific DTI limit, is a requirements and restrictions on loan 198 The Bureau analyzes the performance and more holistic and flexible measure of a terms, and consumers with high-cost pricing for smaller loans in the section-by-section analysis for § 1026.43(e)(2)(vi). consumer’s ability to repay. Mortgage mortgages have enhanced remedies for 199 See Archana Pradhan & Pete Carroll, underwriting, and by extension, a loan’s violations of the law. Further, in 2008, Expiration of the CFPB’s Qualified Mortgage (QM) price, generally includes consideration the Board exercised its authority under GSE Patch—Part IV, LogicCore Insights Blog, (Jan. of a consumer’s DTI. However, loan HOEPA to require certain consumer 11, 2020), https://www.corelogic.com/blog/2020/1/ pricing also includes assessment of expiration-of-the-cfpbs-qualified-mortgage-qm-gse- protections concerning a consumer’s patch-part-iv.aspx. Delinquency measured as of additional factors, including LTV ratios, ability to repay, prepayment penalties, October 2019. 200 See Karan Kaul & Laurie Goodman, Urban 201 See Karan Kaul et al., Urban Inst., Comment 202 See TILA section 103(aa)(i); Regulation Z Inst., Updated: What, If Anything, Should Replace Letter to the Consumer Financial Protection Bureau § 1026.32(a)(1)(i). TILA and Regulation Z also QM GSE Patch, (Oct. 2020), at 9, https:// on the Qualified Mortgage Rule, (Sept. 2019), at 9– provide a separate price-based coverage trigger www.urban.org/sites/default/files/publication/ 10, https://www.urban.org/sites/default/files/ based on the points and fees charged on a loan. See 99268/2018_10_30_qualified_mortgage_rule_ publication/101048/comment_letter_to_the_ TILA section 130(aa)(ii); Regulation Z update_finalized_4.pdf. consumer_financial_protection_bureau_0.pdf. § 1026.32(a)(1)(ii).

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and escrow accounts for taxes and defining ‘‘debt’’ and ‘‘income.’’ repay. For all loans, regardless of loan insurance for a category of ‘‘higher- Therefore, the Bureau is not proposing size, the Bureau is not proposing to alter priced mortgage loans,’’ which have to provide a single, specific set of the current threshold separating safe APR spreads lower than those standards equivalent to appendix Q for harbor from rebuttable presumption prescribed for high-cost mortgages but what must be counted as debt and what QMs in § 1026.43(b)(4), under which a that nevertheless exceed APOR by a may be counted as income for purposes loan is a safe harbor QM if its APR specified threshold.203 Although the of proposed § 1026.43(e)(2)(v)(A). For exceeds APOR for a comparable ATR/QM Rule replaced the ability-to- purposes of this proposed requirement, transaction by less than 1.5 percentage repay requirements promulgated income and debt would be determined points as of the date the interest rate is pursuant to HOEPA and the Board’s in accordance with proposed set. As such, loans that otherwise meet 2008 rule,204 higher-priced mortgage § 1026.43(e)(2)(v)(B), which requires the the General QM loan definition and for loans remain subject to additional creditor to verify the consumer’s current which the APR exceeds APOR by 1.5 or requirements related to escrow accounts or reasonably expected income or assets more percentage points (but by less than for taxes and homeowners insurance other than the value of the dwelling 2 percentage points) as of the date the and to appraisal requirements.205 The (including any real property attached to interest rate is set would receive a ATR/QM Rule itself provides additional the dwelling) that secures the loan, and rebuttable presumption of compliance protection to QMs that are higher-priced the consumer’s current debt obligations, with the ATR provisions. This approach covered transactions, as defined in alimony, and child support. The is discussed further, below. § 1026.43(b)(4), in the form of a proposed rule would provide a safe Finally, the Bureau notes its analysis rebuttable presumption of compliance harbor to creditors using verification of the potential effects on access to with the ATR provisions, instead of a standards the Bureau specifies. This credit of a price-based approach to conclusive safe harbor. could potentially include relevant defining a General QM loan. As Finally, the Bureau preliminarily provisions from Fannie Mae’s Single indicated by the various combinations concludes that a price-based General Family Selling Guide, Freddie Mac’s QM loan definition would provide in Table 7 below, 2018 HMDA data Single-Family Seller/Servicer Guide, show that under the current rule— compliance certainty to creditors, since FHA’s Single Family Housing Policy creditors would be able to readily including the Temporary GSE QM loan Handbook, the VA’s Lenders Handbook, definition, the General QM loan determine whether a loan is a General and the Field Office Handbook for the QM loan. Creditors have experience definition with a 43 percent DTI limit, Direct Single Family Housing Program and the Small Creditor QM loan with APR calculations due to the and Handbook for the Single Family existing price-based regulatory definition in § 1026.43(e)(5)—90.6 Guaranteed Loan Program of the U.S. percent of conventional purchase loans requirements described above, and for Department of Agriculture (USDA), various other disclosure and compliance were safe harbor QM loans and 95.8 current as of the proposal’s public percent were safe harbor QM or reasons under Regulation Z. Creditors release. However, under the proposal, also have experience determining the rebuttable presumption QM loans. creditors would not be required to verify Under the proposed General QM rate appropriate APOR for use in calculating income and debt according to the rate spreads. As such, the Bureau spread thresholds of 1.5 (safe harbor) standards the Bureau specifies. Rather, and 2 (rebuttable presumption) believes this approach would provide the proposed rule would also provide certainty to creditors regarding a loan’s percentage points over APOR, which are 206 creditors with the flexibility to develop described further, below, 91.6 percent of status as a QM. other methods of compliance with the Although the proposal would require conventional purchase loans would verification requirements. creditors to consider the consumer’s have been safe harbor QM loans and Under the proposal, a loan would 96.1 percent would have been safe income, debt, and DTI ratio or residual meet the General QM loan definition in income, the proposal would not provide harbor QM or rebuttable presumption § 1026.43(e)(2) only if the APR exceeds 207 a specific DTI limit. For the reasons QM loans. Based on these 2018 data, APOR for a comparable transaction by rate spread thresholds of 1–2 percentage discussed below in the section-by- less than two percentage points as of the section analysis of § 1026.43(e)(2)(v)(A), points over APOR for safe harbor QM date the interest rate is set. As described loans would have covered 83.3 to 94.1 the Bureau preliminarily concludes that below in the section-by-section analysis it is appropriate to remove current percent of the conventional purchase of § 1026.43(e)(2)(vi), the Bureau market (as safe harbor QM loans), while appendix Q and instead provide tentatively concludes that this threshold creditors additional flexibility for rate spread thresholds of 1.5–2.5 would strike an appropriate balance percentage points over APOR for between ensuring that loans receiving 203 73 FR 44522 (July 30, 2008). rebuttable presumption QM loans 204 The Board’s 2008 rule was superseded by the QM status may be presumed to comply would have covered 94.3 to 96.8 percent January 2013 Final Rule, which imposed ability to with the ATR provisions and ensuring of the conventional purchase market (as repay requirements on a broader range of closed- that access to responsible, affordable safe harbor and rebuttable presumption end consumer credit transactions secured by a mortgage credit remains available to QM loans). dwelling. See generally 78 FR 6407 (Jan. 30, 2013). consumers. For these same reasons, the 205 See § 1026.35(b) and (c). 206 The Bureau understands from feedback that Bureau is proposing higher thresholds 207 All estimates in Table 7 include loans that creditors are concerned about errors in DTI for smaller loans and subordinate-lien meet the Small Creditor QM loan definition in calculations and have previously requested that the transactions, as the Bureau is concerned § 1026.43(e)(5). In particular, loans originated by Bureau permit a cure of DTI overages that are that loans with lower loan amounts may small creditors that meet the criteria in discovered after consummation. See 79 FR 25730, § 1026.43(e)(5) are safe harbor QM loans if priced 25743–45 (May 6, 2014) (requesting comment on be priced higher than larger loans, even below 3.5 percentage points over APOR or are potential cure or correction provisions for DTI when the consumers have similar credit rebuttable presumption QM loans if priced 3.5 overages). characteristics and a similar ability to percentage points or more over APOR.

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TABLE 7—SHARE OF 2018 CONVENTIONAL FIRST-LIEN PURCHASE LOANS WITHIN VARIOUS PRICE-BASED SAFE HARBOR (SH) QM AND REBUTTABLE PRESUMPTION (RP) QM DEFINITIONS (HMDA DATA)

Safe harbor QM QM overall (share of (share of Approach conventional conventional purchase market) purchase market)

Temporary GSE QM + DTI 43 ...... 90.6 95.8 Proposal (SH 1.50, RP 2.00) ...... 91.6 96.1 SH 0.75, RP 1.50 ...... 74.6 94.3 SH 1.00, RP 1.50 ...... 83.3 94.3 SH 1.25, RP 1.75 ...... 88.4 95.3 SH 1.35, RP 2.00 ...... 89.8 96.1 SH 1.40, RP 2.00 ...... 90.5 96.1 SH 1.75, RP 2.25 ...... 93.1 96.6 SH 2.00, RP 2.50 ...... 94.1 96.8

Despite the expected benefits of a time, to one which is more variable. An creditors may be unable to sell the loans price-based General QM loan definition, identical loan to a consumer with the profitably in the secondary markets, or the Bureau acknowledges concerns same risk profile might satisfy the even sell the loans at all. While APOR about the approach. First, while the requirements of the General QM loan would also increase during periods of Bureau believes a loan’s price may be a definition at one point in time but not economic stress and low secondary more holistic and flexible measure of a at another since APOR will change over market liquidity, consumers with riskier consumer’s ability to repay than DTI time. The Bureau also anticipates that a credit characteristics may see alone, the Bureau recognizes that there price-based approach would incentivize disproportionate pricing increases is a distinction between credit risk, some creditors to price some loans just relative to the increases in a more which largely determines pricing below the threshold so that the loans normal economic environment. These relative to the prime rate, and a will receive the presumption of effects would likely make price-based particular consumer’s ability to repay, compliance that comes with QM status. QM standards pro-cyclical, with a more which is one component of credit risk. While the Bureau acknowledges these expansive QM market when the Pricing is based on creditors’ expected criticisms of a price-based approach, the economy is expanding, and a more net revenues (i.e., whether a creditor Bureau’s delinquency analyses and the restrictive QM market when credit is will earn interest payments and recover analyses by external parties discussed tight. As a result, a rate spread-based the outstanding principal balance in the above provide evidence that rate QM threshold would likely be less event of default). While a consumer’s spreads are correlated with effective in limiting risky loans during ability to afford loan payments is an delinquency. periods of strong housing price growth important component of pricing, the Finally, the Bureau is aware of or encouraging safe loans during periods loan’s price will reflect additional concerns about the sensitivity of a price- of weak housing price growth. The factors related to the loan that may not based QM definition to macroeconomic Bureau is particularly concerned about in all cases be probative of the cycles. In particular, the Bureau is these potential effects given the recent consumer’s repayment ability. As noted aware of concerns that the price-based economic disruptions associated with above, the proposal includes a approach would be a dynamic, trailing the COVID–19 pandemic. As described requirement to consider the consumer’s indicator of risk and could be pro- in part V.E below, the Bureau is DTI ratio or residual income as part of cyclical. For example, during periods of requesting comment on an alternative, the General QM loan definition, and to economic expansion, increasing house DTI-based approach. Unlike a price- verify the debt and income used to prices and strong demand from based approach, a DTI-based approach calculate DTI or residual income, consumers with weaker credit would be counter-cyclical, because of because the Bureau believes these are characteristics often lead to greater the positive correlation between interest important factors in assessing a availability of credit, as secondary rates and DTI ratios. The alternative consumer’s ability to repay. These market investors expect minimal losses, proposal is discussed in detail in part requirements are discussed further regardless of whether the consumer V.E. below and in the section-by-section defaults, due to increasing collateral As noted above, stakeholders have analysis of § 1026.43(e)(2)(v). values. This may result in an suggested a range of options to replace The Bureau also acknowledges that underpricing of credit risk. To the the 43 percent DTI limit in the General factors unrelated to the individual loan extent that occurs, rate spreads over QM loan definition. The Bureau has can influence its price. Institutional APOR would compress and additional considered these options in developing factors, such as the competing policy higher-priced, higher-risk loans would this proposed rule but is not providing considerations inherent in setting fit within the proposed General QM specific proposals for these alternatives guarantee fees on GSE loans, can loan definition. Further, during periods because the Bureau has preliminarily influence mortgage pricing of economic downturn, investors’ concluded that the price-based independently of credit risk or ability to demand for mortgage credit may fall as approach in proposed § 1026.43(e)(2) repay and would have some effect on they seek safer investments to limit would best achieve the statutory goals of which loans would be priced under the losses in the event of a broader ensuring consumers’ ability to repay proposed General QM loan pricing economic decline. This may result in and maintaining access to responsible, threshold. The price-based approach creditors reducing the availability of affordable, mortgage credit. For also shifts the QM determination from a mortgage credit to riskier borrowers, example, some stakeholders have DTI calculation, which is relatively through credit overlays and price suggested that the Bureau rely only on consistent across creditors and over increases, to protect against the risk that the statutory QM loan restrictions (i.e.,

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prohibitions on certain loan features, compensating factors and set applicable in light of the concerns about the requirements for underwriting, and a thresholds for those factors. The Bureau sensitivity of a price-based QM limitation on points and fees) to define is concerned that incorporating definition to macroeconomic cycles, the a General QM loan. The Bureau is not compensating factors into the General Bureau requests comment on whether it proposing this approach because it is QM loan definition would not provide should consider adjusting the pricing concerned that such an approach, which creditors adequate certainty about thresholds in emergency situations and, would define a General QM loan whether a loan satisfies the if so, how the Bureau should do so. The without either a direct or indirect requirements of the General QM loan Bureau also requests comment on how measure of the consumer’s finances, definition, given that it would be revisions to the General QM loan may not adequately ensure that difficult to create a bright-line rule that definition can support innovations in consumers have a reasonable ability to incorporates a range of compensating underwriting that would facilitate repay their loans according to the loan factors. Further, the Bureau is access to credit, while ensuring that terms. concerned that a rule that incorporates loans granted QM status are those that Other stakeholders have suggested only a few compensating factors might should be presumed to comply with the that the Bureau retain DTI as part of the cause the market to over-emphasize ATR provisions. General QM loan definition, but with those factors over others that might be As noted, the Bureau is proposing to modifications to the current rule. Some equally predictive of a consumer’s require a creditor to consider a stakeholders have advocated for ability to repay, potentially stifling consumer’s monthly DTI ratio or increasing the DTI limit to some other innovation and limiting access to credit. residual income, which the Bureau percentage to address concerns that the The Bureau has decided not to propose believes would help ensure that QMs 43 percent DTI limit is too restrictive an approach that would combine a remain within a consumer’s ability to and may exclude consumers for whom specific DTI limit with compensating repay without the need to set a specific it might be appropriate to presume factors. DTI limit. However, as discussed in ability to repay for their loans at The Bureau also acknowledges that more detail in part V.E below, the consummation. Another stakeholder some stakeholders have requested that Bureau also specifically requests suggested a hybrid approach that would the Bureau make the Temporary GSE comment on whether, instead of or in eliminate the DTI limit only for loans QM loan definition permanent. The addition to a price-based threshold, the below a set pricing threshold, such that Bureau is not proposing this alternative rule should retain a DTI limit as part of less expensive loans could obtain because it is concerned that there is not the General QM loan definition or to General QM loan status by meeting the a basis to presume for an indefinite determine which loans receive a safe statutory QM factors and more period that loans eligible to be harbor or a rebuttable presumption of expensive loans could be General QM purchased or guaranteed by the GSEs— compliance. loans only if the consumer’s DTI ratio is whether or not the GSEs are under below a set threshold. This stakeholder conservatorship—have been originated D. The QM Presumption of Compliance suggests that more expensive loans pose with appropriate consideration of Under a Price-Based QM Definition greater risks to consumers, so it is consumers’ ability to repay. Making the critical to include a DTI limit for such Temporary GSE QM loan definition The Bureau is not proposing to alter loans. The Bureau recognizes these permanent could stifle innovation and the approach in the current ATR/QM concerns and, as explained in part V.E, the development of competitive private- Rule of providing a conclusive below, is requesting comment on sector approaches to underwriting. The presumption of compliance (i.e., a safe whether an alternative approach that Bureau is also concerned that, as long as harbor) to loans that meet the General adopts a higher DTI limit or a hybrid the Temporary GSE QM loan definition QM loan requirements in § 1026.43(e)(2) approach that combines pricing and a continues in effect, the non-GSE private and for which the APR exceeds APOR DTI limit, along with a more flexible market is less likely to rebound, and for a comparable transaction by less standard for defining debt and income, that the existence of the Temporary GSE than 1.5 percentage points as of the date could provide a superior alternative to QM loan definition may be contributing the interest rate is set. Loans that meet the price-based approach. In particular, to the continuing limited non-GSE the General QM loan requirements in the Bureau is requesting comment on private market. § 1026.43(e)(2), including the pricing whether such an approach would The Bureau requests comment on all thresholds in § 1026.43(e)(2)(vi), and for adequately balance considerations aspects of the proposal to remove the which the APR exceeds APOR for a related to ensuring consumers’ ability to General QM loan definition’s specific comparable transaction by 1.5 repay and maintaining access to credit, DTI limit in § 1026.43(e)(2)(vi) and percentage points or more as of the date which are described above. replace it with a with a price-based the interest rate is set would receive a Other stakeholders have advocated for threshold. In particular, the Bureau rebuttable presumption of compliance. granting QM status to loans with DTI requests comment, including data or Therefore, a loan that otherwise meets ratios above a prescribed limit if certain other analysis, on whether pricing is the General QM loan definition would compensating factors are present, such predictive of loan performance and receive a rebuttable presumption of as credit score, LTV ratio, and cash whether the Bureau should consider compliance with the ATR provisions if reserves. Similarly, another stakeholder other requirements, in addition to a the APR exceeds APOR between 1.5 suggested the Bureau define General price-based threshold, as part of the percentage points and less than 2 QM loans by reference to a multi-factor General QM loan definition. The Bureau percentage points as of the interest rate approach that combines DTI ratio, LTV also requests comment on whether and is set. The proposal would provide a ratio, and credit score. The Bureau is to what extent the private market would rebuttable presumption of compliance concerned about the complexity of these provide access to credit by originating up to a higher pricing threshold for approaches. In particular, these responsible, affordable mortgages that smaller loans, depending on the loan approaches would present the same would no longer receive QM status amount, and for subordinate-lien challenges with defining debt and when the Temporary GSE QM loan transactions, as described further in the income described above and would also definition expires, including loans with section-by-section analysis of require the Bureau to define DTI ratios above 43 percent. In addition, § 1026.43(e)(2)(vi).

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Under the ATR/QM Rule, a creditor for loans that are not ‘‘higher-priced considerably worse than prime loans.220 that makes a QM loan receives either a covered transactions.’’ 211 The Bureau therefore concluded that rebuttable or conclusive presumption of In the January 2013 Final Rule, the QMs that are higher-priced covered compliance with the ATR provisions, Bureau identified several reasons why transactions would receive a rebuttable depending on whether the loan is a loans that are not higher-priced loans presumption of compliance with the higher-priced covered transaction. The (generally prime loans) should receive a ATR provisions. The Bureau recognized Rule generally defines higher-priced safe harbor. The Bureau noted that the that this approach could modestly covered transaction in § 1026.43(b)(4) to fact that a consumer receives a prime increase the litigation risk for subprime mean a first-lien mortgage with an APR rate is itself indicative of the absence of QMs but did not expect that imposing that exceeds APOR for a comparable any indicia that would warrant a loan a rebuttable presumption for higher- transaction as of the date the interest level price adjustment, and thus is priced QMs would have a significant rate is set by 1.5 or more percentage suggestive of the consumer’s ability to impact on access to credit.221 points; or a subordinate-lien transaction repay.212 The Bureau noted that prime The Bureau is not proposing to alter with an APR that exceeds APOR for a rate loans have performed significantly this general approach to the comparable transaction as of the date better historically than subprime loans presumption of compliance. the interest rate is set by 3.5 or more and that the prime segment of the Specifically, the Bureau is not percentage points.208 The Rule provides market has been subject to fewer proposing to amend the approach under in § 1026.43(e)(1)(i) that a creditor that abuses.213 The Bureau noted that the the current rule, in which General QM makes a QM loan that is not a higher- QM requirements will ensure that the loans that are higher-priced covered priced covered transaction is entitled to loans do not contain certain risky transactions (up to the pricing a safe harbor from liability under the product features and are underwritten thresholds set out in proposed ATR provisions. Under with careful attention to consumers’ DTI § 1026.43(e)(2)(vi)) receive a rebuttable § 1026.43(e)(1)(ii), a creditor that makes ratios.214 The Bureau also noted that a presumption of compliance with the a QM loan that is a higher-priced safe harbor provides greater legal ATR requirements and General QM covered transaction is entitled to a certainty for creditors and secondary loans that are not higher-priced covered rebuttable presumption that the creditor market participants and may promote transactions receive a safe harbor. As has complied with the ATR provisions. enhanced competition and expand discussed above, the Bureau has 215 In developing the approach to the access to credit. The Bureau preliminarily concluded that pricing is presumptions of compliance for QMs in determined that if a loan met the strongly correlated with loan product and underwriting requirements performance and that pricing thresholds the January 2013 Final Rule, the Bureau for QM and was not a higher-priced should be included in the General QM first considered whether the statute covered transaction, there are sufficient loan definition in § 1026.43(e)(2). The prescribes if QM loans receive a grounds for concluding that the creditor Bureau preliminarily concludes that for conclusive or rebuttable presumption of satisfied the ATR provisions.216 prime loans, the pricing, in conjunction compliance with the ATR provisions. The Bureau in the January 2013 Final with the revised QM requirements in As discussed above, TILA section Rule pointed to factors to support its proposed § 1026.43(e)(2), provides 129C(b) provides that loans that meet decision to adopt a rebuttable sufficient grounds for supporting a certain requirements are ‘‘qualified presumption for QMs that are higher- conclusive presumption that the mortgages’’ and that creditors making priced covered transactions. The Bureau creditor complied with the ATR QMs ‘‘may presume’’ that such loans noted that QM requirements, including requirements. The Bureau recognizes have met the ATR requirements. the restrictions on product features and that the January 2013 Final Rule relied However, the statute does not specify the 43 percent DTI limit, would help in part on the 43 percent DTI limit to whether the presumption of compliance prevent the return of the lax lending support its conclusion that a safe harbor means that the creditor receives a practices prevalent in the years before is appropriate for QMs that are not conclusive presumption or a rebuttable the financial crisis, but that it is not higher-priced covered transactions. presumption of compliance with the possible to define by a bright-line rule However, the Bureau believes that a ATR provisions. The Bureau noted that a class of mortgages for which each specific DTI limit may not be necessary its analysis of the statutory construction consumer will have ability to repay, to support a decision to preserve the and policy implications demonstrates particularly for subprime loans.217 The conclusive presumption, provided that that there are sound reasons for Bureau noted that subprime pricing is the pricing threshold identified for the 209 adopting either interpretation. The often the result of loan level price conclusive presumption is sufficiently Bureau concluded that the statutory adjustments established by the low. As noted above, pricing is strongly language is ambiguous and does not secondary market and calibrated to correlated with loan performance, and mandate either interpretation and that default risk.218 The Bureau also noted the specific 43 percent DTI limit has the presumptions should be tailored to that consumers in the subprime market been problematic, both because of the promote the policy goals of the tend to be less sophisticated and have difficulties of calculating DTI with statute.210 The Bureau interpreted the fewer options and thus are more appendix Q and because, while DTI statute to provide for a rebuttable susceptible to predatory lending ratios in general may also be correlated presumption of compliance with the practices.219 The Bureau noted that with loan performance, the bright-line ATR provisions but used its adjustment subprime loans have performed 43 percent threshold may unduly and exception authority to establish a restrict access to credit for some conclusive presumption of compliance 211 Id. at 6514. consumers for whom it might be 212 Id. at 6511. appropriate to presume ability to repay 213 208 Section 1026.43(b)(4) also provides that a first- Id. at consummation. Further, under the 214 Id. lien covered transaction that is a QM under proposed price-based approach, § 1026.43(e)(5), (e)(6), or § 1026.43(f) is ‘‘higher 215 Id. priced’’ if its APR is 3.5 percentage points or more 216 Id. creditors would be required to consider above APOR. 217 Id. 209 78 FR 6408, 6507 (Jan. 30, 2013). 218 Id. 220 Id. 210 Id. at 6511. 219 Id. 221 Id. at 6511–13.

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DTI or residual income for a loan to threshold for jumbo loans for purposes above, the January 2013 Final Rule satisfy the requirements of the General of certain escrows requirements.225 relied in part on the 43 percent DTI QM loan definition. Moreover, the other Subsequently, the Dodd-Frank Act limit to support its conclusion that a factors noted above appear to continue adopted these same thresholds in TILA safe harbor is appropriate for QMs that supporting a safe harbor for prime QMs, section 129C(a)(6)(D)(ii)(II), which are not higher-priced covered including the better performance of provides that a creditor making a transactions. Under the proposal to prime loans compared to subprime balloon-payment loan with an APR at or replace the current 43 percent DTI limit loans, and the potential benefits of above certain thresholds must with a price-based approach, some loans greater competition and access to credit determine ability to repay using the with DTI ratios above 43 percent will from the greater certainty and reduced contract’s repayment schedule.226 The receive safe harbor QM status. litigation risk arising from a safe harbor. Bureau concluded that a 1.5 percentage The Bureau compared projected early The Bureau is not proposing to alter point threshold for first-lien QMs and delinquency rates under the General the current safe harbor thresholds for 3.5 percentage point threshold for QM loan definition with and without a General QM loans under § 1026.43(e)(2). subordinate-lien QMs balanced 43 percent DTI limit under a range of Under current § 1026.43(b)(4) and competing consumer protection and potential rate-spread based safe harbor (e)(1)(i), a first-lien transaction that is a access to credit considerations.227 The thresholds. Under the current 43 General QM loan under § 1026.43(e)(2) Bureau also concluded that it was not percent DTI limit for first-lien General receives a safe harbor from liability appropriate to extend the safe harbor to QM loans, Table 5 (2002–2008), above, under the ATR provisions if a loan’s first-lien loans above those thresholds indicates early delinquency rates for APR exceeds APOR for a comparable because that approach would provide loans with rate spreads just below 1.5 transaction by less than 1.5 percentage insufficient protection to consumers in percentage points increase with DTI, points as of the date the interest rate is loans with higher interest rates who from 6 percent for loans with a DTI ratio set. Current paragraphs (b)(4) and may require greater protection than of 20 percent or below to 11 percent for (e)(1)(i) of § 1026.43 provide a separate consumers in prime rate loans.228 loans with DTI ratios from 41 to 43 safe harbor threshold of 3.5 percentage For the reasons set forth below, the percent. For loans with rate spreads just points for subordinate-lien transactions. Bureau is not proposing to alter the safe below 1.5 percentage points and DTI The Bureau is also not proposing to harbor threshold of 1.5 percentage ratios above 43 percent, Table 5 amend that threshold.222 points for first-lien General QM loans indicates early delinquency rates As explained above, the Bureau’s under the price-based approach in between 12 percent (for loans with 44 to January 2013 Final Rule generally proposed § 1026.43(e)(2). The Bureau 45 percent DTI ratios) and 15 percent viewed loans with APRs that did not tentatively concludes that the current (for loans with DTI ratios of 61 to 70 exceed APOR by more than 1.5 safe harbor threshold of 1.5 percentage percent). The loans at that rate spread percentage points (and 3.5 percentage points for first liens is appropriate to with DTI ratios above 43 percent in points for subordinate-lien transactions) restrict safe harbor QMs to lower-priced, Table 5 are loans that are not QMs to be prime loans which, if the loan generally less risky, loans while under the current General QM loan satisfies the criteria to be a QM, may be ensuring that responsible, affordable definition in § 1026.43(e)(2) because of conclusively presumed to comply with credit remains available to consumers. the 43 percent DTI limit, but that would the ATR provisions. In support of The Bureau generally believes these be QMs under the proposed General QM providing a conclusive presumption of same considerations support not loan definition in § 1026.43(e)(2) in the compliance to prime loans, the Bureau changing the current safe harbor absence of the 43 percent DTI limit. cited the absence of loan level price threshold of 3.5 percentage points for Therefore, the loans that would be adjustments for those loans (which the subordinate-lien transactions, which newly granted safe harbor status under Bureau viewed as indicative of the generally perform better and have the proposed price-based approach at a consumer’s ability to repay), the stronger credit characteristics than first- safe harbor threshold of 1.5 percentage historical performance of prime rate lien transactions. The Bureau’s proposal points are likely to have a somewhat loans compared to subprime loans, and to address subordinate-lien transactions higher early delinquency rate than those historically fewer abusive practices in is discussed further below in the just at or below 43 percent DTI ratios, 223 the prime market. With respect to the section-by-section analysis of 12 to 15 percent versus 11 percent. The specific thresholds chosen to separate § 1026.43(e)(2)(vi). comparable early delinquency rates for safe harbor from rebuttable presumption As explained above, the Bureau uses 2018 loans from Table 6 also show a QM loans, the Bureau in the January early delinquency rates as a proxy for slightly higher early delinquency rate 2013 Final Rule noted that the line it measuring whether a consumer had for DTI ratios above 43 percent was drawing had long been recognized ability to repay at the time the mortgage compared to loans with DTI ratios of 36 as a rule of thumb to separate prime loan was originated. Here, the Bureau to 43 percent: 2.3 percent versus 1.5 224 loans from subprime loans. The 1.5 analyzed early delinquency rates in percent. percentage point above APOR threshold considering whether it should propose The Bureau acknowledges that removing the 43 percent DTI limit while is the same as that used in the Board’s to revise the threshold for first-lien safe retaining a 1.5 percentage point safe 2008 HOEPA Final Rule, described harbor General QM loans under the harbor threshold would lead to above, which was amended by the proposed price-based approach; that is, somewhat higher-risk loans obtaining Board’s 2011 Jumbo Loans Escrows which first-lien General QM loans safe harbor QM status relative to loans Final Rule to include a separate should be conclusively presumed to within the current General QM loan comply with the ATR provisions in the 222 definition. However, Bureau analysis As noted above, the Bureau is not proposing absence of a specific DTI limit. As noted to alter the higher threshold of 3.5 percentage shows the early delinquency rate for points over APOR for small creditor portfolio QMs this set of loans is on par with loans that and balloon-payment QMs made by certain small 225 Id. at 6451; see also 76 FR 11319 (Mar. 2, creditors pursuant to § 1026.43(e)(5), (e)(6) and (f). 2011) (2011 Jumbo Loans Escrows Final Rule). have received safe harbor QM status See § 1026.43(b)(4). 226 78 FR 6408, 6451 (Jan. 30, 2013). under the Temporary GSE QM loan 223 78 FR 6408, 6511 (Jan. 30, 2013). 227 Id. at 6514. definition. Restricting the sample of 224 Id. at 6408. 228 Id. 2018 NMDB–HMDA matched first-lien

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conventional purchase originations to 1.5 percentage points over APOR for because the Bureau preliminarily only those purchased and guaranteed by first liens under a price-based General concludes that such an approach would the GSEs, loans with DTI ratios above 43 QM loan definition would not have an provide insufficient protection to and rate spreads between 1 and 1.49 adverse effect on access to credit. In consumers in loans with higher interest percentage points had an early particular, the Bureau estimates that the rates who may require greater protection delinquency rate of 2.4 percent.229 size of the safe harbor QM market would than consumers in prime rate loans. The Consequently, the Bureau does not be comparable to the size of that market Bureau preliminarily concludes that believe that the price-based alternative with the Temporary GSE QM loan providing a safe harbor for prime loans would result in substantially higher definition in place and may expand is necessary and proper to facilitate delinquency rates than the standard slightly under the proposed compliance with and to effectuate the included in the current rule. amendments to the General QM loan purposes of section 129C and TILA, The Bureau also considered definition in § 1026.43(e)(2), if the rule including to assure that consumers are continued access to responsible, retains the current safe harbor offered and receive residential mortgage affordable mortgage credit in deciding threshold.232 loans on terms that reasonably reflect not to propose revisions to the current As discussed above and in the January their ability to repay the loans. 1.5 percentage point safe harbor 2013 Final Rule, TILA does not plainly The Bureau requests comment on threshold. The Bureau is concerned that mandate either a safe harbor or a whether the rule should retain the a safe harbor threshold lower than 1.5 rebuttable presumption approach to a current thresholds separating safe percentage points could reduce access QM presumption of compliance.233 harbor from rebuttable presumption to credit, as some loans that are General With respect to General QM prime loans General QM loans and specifically QM loans under current § 1026.43(e)(2) (General QM loans with an APR that requests feedback on whether the and receive a safe harbor would instead does not exceed APOR by 1.5 or more Bureau should adopt higher or lower receive a rebuttable presumption of percentage points for first liens), the safe harbor thresholds. The Bureau compliance under proposed Bureau preliminarily concludes that it is encourages commenters to suggest § 1026.43(e)(2). HMDA data analyzed by appropriate to use its adjustment specific rate spread thresholds for the the Bureau in the Assessment Report authority under TILA section 105(a) to safe harbor. In particular, the Bureau suggest that the safe harbor threshold of retain a conclusive presumption (i.e., a requests comment on whether it may be 1.5 percentage points has not safe harbor). The Bureau preliminarily appropriate to set the safe harbor constrained lenders, as the share of concludes that this approach would threshold for first-lien transactions originations above the threshold balance the competing consumer lower than 1.5 percentage points over remained steady after the protection and access to credit APOR in light of the comparatively implementation of the ATR/QM Rule.230 considerations described above. The lower delinquency rates associated with However, the Report noted that these Bureau acknowledges that, under the high-DTI loans at lower rate spreads, as results are likely explained by the fact price-based approach in proposed reflected in Tables 5 and 6. that, since the Board’s issuance of a rule § 1026.43(e)(2), General QM loans The Bureau acknowledges that in 2008, an ability-to-repay requirement would not be limited to those with DTI adopting a threshold below 1.5 has applied to a category of mortgage ratios that do not exceed 43 percent, as percentage points over APOR could loans that is substantially the same as is the case under the current rule. have some negative impact on access to rebuttable presumption QMs under the However, the Bureau preliminarily credit, as some loans that are General January 2013 Final Rule.231 The Bureau concludes that it remains appropriate to QM loans under current § 1026.43(e)(2) is concerned about the potential effects provide a safe harbor to these loans. The and receive a safe harbor would instead on access to credit if the threshold is Bureau has recognized that receipt of a receive a rebuttable presumption of lowered, as loans that are newly subject prime rate is suggestive of a consumer’s compliance under proposed to the rebuttable presumption rather ability to repay.234 Further, the Bureau § 1026.43(e)(2). The Bureau similarly than the safe harbor may cost materially notes that proposed § 1026.43(e)(2)(v) requests comment on whether it may be more to consumers. For example, the would impose new requirements for the appropriate to set the safe harbor Bureau is concerned that some loans creditor to consider the consumer’s threshold for first liens higher than 1.5 that would have been originated as income, debt, and monthly debt-to- percentage points over APOR. The conventional mortgages may instead be income ratio or residual income to Bureau acknowledges that some originated as FHA loans, which the satisfy the General QM loan definition, commenters to the ANPR suggested that Bureau expects would cost materially thus retaining a requirement that the the current safe harbor threshold is too more for many consumers. The Bureau creditor consider key aspects of the low and may have an adverse impact on expects that a safe harbor threshold of consumer’s financial capacity. The access to credit, including for minority Bureau is not proposing to extend the consumers. At the same time, the 229 This comparison uses 2018 data on GSE safe harbor to higher-priced loans Bureau notes its concern about higher originations because such loans were originated early delinquency rates at higher safe while the Temporary GSE QM loan definition was 232 The Bureau estimates that 90.9 percent of harbor thresholds and is concerned that in effect and the GSEs were in conservatorship. GSE conventional purchase loans in 2018 HMDA data such an approach might result in safe loans from the 2002 to 2008 period were originated fell within safe harbor QM status under the current under a different regulatory regime and with rule with the Temporary GSE QM loan definition. harbors for loans for which it would not different underwriting practices (e.g., GSE loans The Bureau estimates that under the proposed be appropriate to presume conclusively more commonly had DTI ratios over 50 percent changes to the General QM loan definition in that consumers have a reasonable ability during the 2002 to 2008 period), and thus may not § 1026.43(e)(2), 91.9 percent of those conventional to repay their loans according to the be directly comparable to loans made under the purchase loans would have had safe harbor QM Temporary GSE QM loan definition. status if the current safe harbor threshold of 1.5 loan terms. The Bureau requests 230 Assessment Report, supra note 58, section 5.5, percentage points remains in place. Therefore, the comment on whether a safe harbor at 187. Bureau expects that the proposed changes would threshold of 2 percentage points over 231 Id. at 182. The Assessment Report explained result in a comparable, or somewhat increased, APOR would balance considerations that because of their nearly identical definitions, portion of the QM share of the market that would higher-priced mortgage loans (HPMLs) may serve as be protected by the safe harbor. regarding access to credit and ability to a proxy for higher-priced covered transactions 233 78 FR 6408, 6513 (Jan. 30, 2013). repay. For commenters that recommend under the ATR/QM Rule in analysis of HMDA data. 234 Id. at 6511. a safe harbor threshold higher than 1.5

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percentage points over APOR (such as a meeting the prerequisites of a QM. At Accordingly, the Bureau anticipates that 2-percentage point threshold), the the same time, the Bureau stated that it the addition of DTI ratio to the rebuttal Bureau requests comment on an believed the standard was sufficiently standard would not add probative value appropriate threshold to separate QM clear to provide certainty to creditors, beyond the current residual income test loans from non-QM loans. As discussed investors, and regulators about the in § 1026.43(e)(1)(ii)(B). Second, the in the section-by-section analysis of standards by which the presumption Bureau anticipates that the addition of § 1026.43(e)(2)(vi), below, the Bureau is can successfully be challenged in cases DTI ratio as a ground to rebut the proposing that loans with rate spreads where creditors have correctly followed presumption of compliance would between 1.5 and less than 2 percentage the QM requirements. The Bureau also undermine compliance certainty to points over APOR receive a rebuttable noted that the standard was consistent creditors and the secondary market presumption of compliance with the with the standard in the 2008 HOEPA without providing any clear benefit to ATR provisions, and that loans with rate Final Rule.235 Commentary to that rule consumers. The Bureau tentatively spreads of 2 percentage points over provides, as an example of how its determines that the rebuttable APOR or higher would not meet the presumption may be rebutted, that the presumption standard would continue General QM loan definition. consumer could show ‘‘a very high debt- to be sufficiently broad to provide Commenters are encouraged to provide to-income ratio and a very limited consumers a reasonable opportunity to data or other material to support their residual income . . . depending on all demonstrate that the creditor did not recommendations, as well as of the facts and circumstances.’’ 236 The have a good faith and reasonable belief suggestions for commentary that would Bureau noted that, under the definition in the consumer’s repayment ability, assist in understanding the application of QM that the Bureau was adopting, the despite meeting the prerequisites of a of the thresholds. creditor was generally not entitled to a QM. The Bureau requests comment on With respect to General QM loans that presumption if the consumer’s DTI ratio its tentative determination not to amend are higher-priced covered transactions was ‘‘very high.’’ The Bureau stated the grounds on which the presumption the Bureau preliminarily concludes that that, as a result, the Bureau was of compliance can be rebutted. The such loans should receive a rebuttable focusing the standard for rebutting the Bureau also requests comment on presumption of compliance with the presumption in the January 2013 Final whether to amend the grounds on which ATR requirements. Such loans would Rule on whether, despite meeting a DTI the presumption of compliance can be have to satisfy the revised QM test, the consumer nonetheless had rebutted, such as where the consumer requirements of § 1026.43(e)(2), and so insufficient residual income to cover the has a very high DTI and low residual would be prevented from including consumer’s living expenses.237 income. To the extent commenters risky features and would be priced only The Bureau is not proposing to suggest that the Bureau should amend moderately above prime loans. change the standard for rebutting the the grounds on which to rebut the Accordingly, the Bureau preliminarily presumption of compliance because it presumption to add instances of a concludes that a rebuttable presumption believes the existing standard continues consumer having very high DTI, the of compliance is warranted for such to balance the consumer protection and Bureau requests comment on whether loans. This approach may strike an access to credit considerations and how to define ‘‘very high DTI.’’ appropriate balance between the access described above appropriately. For The Bureau requests comment on all to credit benefits that arise from example, the Bureau is not amending aspects of the proposed approach for the providing a greater degree of certainty the presumption of compliance to presumption of compliance. In that such loans comply with the ATR provide that the consumer may use the particular, the Bureau requests requirements and the consumer DTI ratio to rebut the presumption of comment, including data or other protections that stem from permitting compliance by establishing that the DTI analysis, on whether a safe harbor for consumers the opportunity to rebut the ratio is very high, or by establishing that QMs that are not higher priced is presumption of compliance. the DTI ratio is very high and that the appropriate and, if so, on whether other The Bureau is not proposing to revise residual income is not sufficient. First, requirements should be imposed for § 1026.43(e)(1)(ii)(B), which defines the the Bureau tentatively determines that such QMs to receive a safe harbor. grounds on which the presumption of permitting the consumer to rebut the E. Alternative to the Proposed Price- compliance that applies to higher-priced presumption by establishing that the Based QM Definition: Retaining a DTI QMs can be rebutted. Section DTI ratio is very high is not necessary Limit 1026.43(e)(1)(ii)(B) provides that a because the existing rebuttal standard consumer may rebut the presumption by already incorporates an examination of Although the Bureau is proposing to showing that, at the time the loan was the consumer’s actual income and debt remove the 43 percent DTI limit and originated, the consumer’s income and obligations (i.e., the components of the adopt a price-based approach for the debt obligations left insufficient residual DTI ratio) by providing the consumer General QM loan definition, the Bureau income or assets to meet living the option to show that the consumer’s requests comment on an alternative expenses. The analysis considers the residual income—which is calculated approach that retains a DTI limit, but consumer’s monthly payments on the using the same components—was raises it above the current limit of 43 loan, mortgage-related obligations, and insufficient at consummation. percent and provides a more flexible set any simultaneous loans of which the of standards for verifying debt and creditor was aware, as well as any 235 Id. at 6512. income in place of appendix Q. recurring, material living expenses of 236 See Regulation Z comment 34(a)(4)(iii)–1. As discussed above, the Bureau is which the creditor was aware. 237 78 FR 6408, 6511–12 (Jan. 30, 2013). The proposing to remove the 43 percent DTI The Bureau stated in the January 2013 Bureau in the January 2013 Final Rule stated that limit because it is concerned that, after it interpreted TILA section 129C(b)(1) to create a Final Rule that this standard was rebuttable presumption of compliance, but the expiration of the Temporary GSE sufficiently broad to provide consumers exercised its adjustment authority under TILA QM loan definition, the 43 percent DTI a reasonable opportunity to demonstrate section 105(a) to limit the ability to rebut the limit would result in a significant that the creditor did not have a good presumption because the Bureau found that an reduction in the size of QM and open-ended rebuttable presumption would unduly faith and reasonable belief in the restrict access to credit without a corresponding potentially could result in a significant consumer’s repayment ability, despite benefit to consumers. Id. at 6514. reduction in access to credit. The

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Bureau proposes to move away from a January 2013 Final Rule incorporated Bureau requests comment on whether DTI-based approach because it is DTI as part of the General QM loan such an approach would adequately concerned that imposing a DTI limit as definition because the Bureau believed balance considerations related to a condition for QM status under the the QM criteria should include a ensuring consumers’ ability to repay General QM loan definition may be standard for evaluating the consumer’s and maintaining access to credit. overly burdensome and complex in ability to repay, in addition to the As described above, the Bureau uses practice and may unduly restrict access product-feature restrictions and other early delinquency (measured by to credit because it provides an requirements that are specified in TILA. whether a consumer was ever 60 or incomplete picture of the consumer’s The Bureau has acknowledged that DTI more days past due within the first 2 financial capacity. The Bureau is is predictive of loan performance, and years after origination) as a proxy for the proposing to remove appendix Q some commenters responding to the likelihood of a lack of consumer ability because its definitions of debt and ANPR advocated for retaining a DTI to repay at consummation across a wide income are rigid and difficult to apply limit as part of the General QM loan pool of loans. The Bureau’s analyzed the and do not provide the level of definition, arguing that it is a strong relationship between DTI ratios and compliance certainty that the Bureau indicator of a consumer’s ability to early delinquency, using data on first- anticipated at the time of the January repay. The Bureau adopted a specific lien conventional purchase originations 2013 Final Rule. As noted above, the DTI limit as part of the General QM loan from the NMDB, including a matched Bureau is proposing a price-based definition to provide certainty to sample of NMDB and HMDA loans. General QM loan definition because it creditors that a loan is in fact a QM.239 That analysis, as shown in Tables 3 and preliminarily concludes that a loan’s The Bureau also provided a specific DTI 4 above, shows that early delinquency price, as measured by comparing a limit to give certainty to assignees and rates increase consistently with DTI loan’s APR to APOR for a comparable investors in the secondary market, ratio. This relationship is like the transaction, is a strong indicator of a because the Bureau believed such pattern shown in the Bureau’s analysis consumer’s ability to repay and is a certainty would help reduce possible of early delinquency rates by rate more holistic and flexible measure of a concerns regarding risk of liability and spread. For 2002–2008 originations, as consumer’s ability to repay than DTI promote credit availability.240 shown in Table 3, there was a 7 percent alone. Numerous commenters on the 2011 early delinquency rate for loans with At the same time, the Bureau Proposed Rule and comments submitted DTI ratios between 44 and 48 percent. acknowledges concerns about a price- subsequent to publication of the January For the sample of 2018 originations in based approach, as described in part V, 2013 Final Rule have highlighted the the NMDB matched to HMDA data, as above. In particular, the Bureau value of providing objective shown in Table 4, there was a 0.9 acknowledges the sensitivity of a price- requirements that creditors can identify percent early delinquency rate for loans based QM definition to macroeconomic and apply based on information with DTI ratios between 44 and 50 cycles, including concerns that the contained in loan files. Unlike a price- percent. price-based approach could be pro- based approach, a DTI-based approach Tables 5 and 6 show the early cyclical, with a more expansive QM would be counter-cyclical, because of delinquency rates of these same samples market when the economy is expanding, the positive correlation between interest categorized according to both their DTI and their rate spreads. Table 5, which and a more restrictive QM market when rates and DTI ratios. Consumers’ shows early delinquency rates for the credit is tight. The Bureau is especially monthly payments on their debts—the 2002–2008 data, shows early concerned about these potential effects numerator in DTI—will be higher when delinquency rates as high as 19 percent given the recent economic disruptions interest rates and home prices are high, for loans with DTI ratios between 46 associated with the COVID–19 leading to a more restrictive QM market. and 48 percent that are priced between pandemic. If the QM market were to By contrast, DTI ratios will be lower 2 and 2.24 percentage points over contract, the Bureau would be when interest rates and home prices are APOR. This approximates the loans concerned about a reduction in access to lower, leading to a more expansive QM with the highest DTI and pricing that credit because of the modest amount of market. The Bureau is proposing to remove would be QMs under this alternative. non-QM lending identified in the the 43 percent DTI limit and appendix For comparison, as discussed in the Bureau’s Assessment Report, which the Q, based in substantial part on concerns section-by-section analysis of Bureau understands has declined about access to credit and the challenges § 1026.43(e)(2)(vi), the highest early further in recent months. The Bureau associated with using appendix Q to delinquency rates for loans within the also acknowledges that a small share of define income and debt, and to adopt a current General QM loan definition is loans that satisfy the current General price-based approach for the General 16 percent (DTI ratios of 41 to 43 QM loan definition would lose QM QM loan definition. However, the percent and priced 2 percentage points status under the proposed price-based Bureau requests comment on whether or more over APOR) and the highest approach due to the loan’s rate spread an alternative approach that adopts a early delinquency rates for loans within exceeding the applicable threshold. higher DTI limit and a more flexible the General QM loan definition under For these reasons, the Bureau requests the proposed price-based approach is 22 comment on whether an approach that standard for defining debt and income could mitigate these concerns and percent (DTI ratios of 61 to 70 percent increases the DTI limit to a specific priced between 1.75 and 1.99 threshold within a range of 45 to 48 provide a superior alternative to the price-based approach. In particular, the percentage points over APOR). percent and that includes more flexible Table 6, which shows early definitions of debt and income would be of 45 to 48 percent without a requirement to delinquency rates for the 2018 sample, a superior alternative to a price-based consider compensating factors. The Bureau is allows a similar comparison for 2018 238 approach. As discussed above, the concerned about the complexity of approaches to originations. Table 6 shows early the General QM loan definition that incorporate delinquency rates of 4.2 percent for 238 The Bureau acknowledges that some loans compensating factors, as explained in part V.C, currently originated as Temporary GSE QM loans above. loans with DTI ratios between 44 and 50 have higher DTI ratios. However, the Bureau is 239 78 FR 6408 at 6526–27. percent that are priced 2 percentage concerned about adopting a DTI limit above a range 240 Id. points or more above APOR. However,

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the highest early delinquency rates for loan definition with a 43 percent DTI increase access to credit relative to the loans within the current General QM limit, 90.6 percent of conventional General QM loan definition with a DTI loan definition or the alternative is 4.4 purchase loans were safe harbor QM limit of 43 percent. The magnitude of percent (DTI ratios of 26 to 35 percent loans and 95.8 percent were safe harbor the increase in the size of the QM and priced 2 percentage points or more QM or rebuttable presumption QM market and potential increase in access over APOR). The highest early loans. If, instead, the Temporary GSE to credit depends on the selected DTI delinquency rates for loans within the QM loan definition were not in place limit. A DTI limit in the range of 45 to General QM loan definition under the along with the General QM loan 48 percent would likely result in a QM proposed price-based approach is 3.2 definition (with the 43 percent DTI market that is larger than one with a DTI percent (DTI ratios of 26 to 35 percent limit), and assuming no change in limit of 43 percent but smaller than the priced between 1.5 and 1.99 percentage consumer or creditor behavior from the status quo (i.e., Temporary GSE QM points over APOR). 2018 HMDA data, then only 69.3 loan definition and DTI limit of 43 The Bureau has also analyzed the percent of loans would have been safe percent). However, the Bureau expects potential effects of a DTI-based harbor QM loans and 73.6 percent of that consumers and creditors would approach on the size of QM and loans would have been safe harbor QM respond to changes in the General QM potentially on access to credit. As loans or rebuttable presumption QM loan definition, potentially allowing indicated in Table 8 below, 2018 HMDA loans. Raising the DTI limit above 43 additional loans to be made as safe data show that with the Temporary GSE percent would increase the size of the harbor QM loans or rebuttable QM loan definition and the General QM QM market and, as a result, potentially presumption QM loans.

TABLE 8—SHARE OF 2018 CONVENTIONAL PURCHASE LOANS WITHIN VARIOUS SAFE HARBOR QM AND REBUTTABLE PRESUMPTION QM DEFINITIONS [HMDA data]

Safe harbor QM QM overall (share of (share of Approach conventional conventional market) market)

Temporary GSE QM + DTI 43 ...... 90.6 95.8 Proposal (Pricing at 2.0) ...... 91.6 96.1 DTI limit 43 ...... 69.3 73.6 DTI limit 45 ...... 76.1 80.9 DTI limit 46 ...... 78.8 83.8 DTI limit 47 ...... 81.4 86.6 DTI limit 48 ...... 84.1 89.4 DTI limit 49 ...... 87.0 92.4 DTI limit 50 ...... 90.8 96.4

The Bureau seeks comment on ensuring that QMs are limited to loans ability to repay, while avoiding the whether to retain a specific DTI limit for for which the Bureau should presume potential burden and complexity of a the General QM loan definition, rather that consumers have the ability to repay. DTI limit for many lower-priced loans. than or in addition to the proposed The Bureau also requests comment on The Bureau estimates that 81 percent of price-based approach. The Bureau the macroeconomic effects of a DTI- conventional purchase loans have rate specifically seeks comment on a specific based approach as well as whether and spreads below 1 percentage point and DTI limit between 45 and 48 percent. how the Bureau should weigh such no product features restricted under the The Bureau seeks comment and data on effects in amending the General QM General QM loan definition. For whether increasing the DTI limit to a loan definition. In addition, the Bureau example, the rule could impose a DTI specific percentage between 45 and 48 requests comment on whether, if the limit of 50 percent for loans with rate percent would be a superior alternative Bureau adopts a higher specific DTI spreads at or above 1 percentage point. to the proposed price-based approach, limit as part of the General QM loan Using 2018 HMDA data, the Bureau and, if so, on what specific DTI definition, the Bureau should retain the estimates that 91.5 percent of percentage the Bureau should include in price-based threshold of 1.5 percentage conventional purchase loans would be the General QM loan definition. The points over APOR to separate safe safe harbor QM loans under this Bureau seeks comment and data as to harbor QM loans from rebuttable approach, and 96 percent would be QM how specific DTI percentages would be presumption QM loans for first-lien loans. A similar approach might impose expected to affect access to credit and transactions. a DTI limit above a certain pricing would be expected to affect the risk that The Bureau also requests comment on threshold and also tailor the the General QM loan definition would whether to adopt a hybrid approach in presumption of compliance with the include loans for which the Bureau which a combination of a DTI limit and ATR requirement based on DTI. For should not presume that the consumers a price-based threshold would be used example, the rule could provide that (1) who receive them have the ability to in the General QM loan definition. One for loans with rate spreads under 1 repay. The Bureau also requests such approach could impose a DTI limit percentage point, the loan is a safe comment on whether increasing the DTI only for loans above a certain pricing harbor QM regardless of the consumer’s limit to a specific percentage between threshold, to reduce the likelihood that DTI ratio; (2) for loans with rate spreads 45 to 48 percent would better balance the presumption of compliance with the at or above 1 but less than 1.5 the goals of ensuring access to ATR requirement would be provided to percentage points, a loan is a safe harbor responsible, affordable credit and loans for which the consumer lacks QM if the consumer’s DTI ratio does not

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exceed 50 percent and a rebuttable In particular, the Bureau requests stakeholders develop and the Bureau presumption QM if the consumer’s DTI comment on whether the approach in adopts would provide adequate clarity is above 50 percent; and (3) if the rate proposed § 1026.43(e)(2)(v) could be and flexibility while also ensuring that spread is at or above 1.5 but less than applied with a General QM loan DTI calculations across creditors and 2 percentage points, loans would be definition that includes a specific DTI consumers are sufficiently consistent to rebuttable presumption QM if the limit. As discussed in more detail in the provide meaningful comparison of a consumer’s DTI ratio does not exceed 50 section-by-section discussion of consumer’s calculated DTI to any DTI percent and non-QM if the DTI ratio is § 1026.43(e)(2)(v), proposed ratio threshold specified in the rule. above 50 percent. Using 2018 HMDA § 1026.43(e)(2)(v)(A) would require The Bureau also requests comment on data, the Bureau estimates that 91.5 creditors to consider income or assets, what changes, if any, would be needed percent of conventional purchase loans debt obligations, alimony, child to proposed § 1026.43(e)(2)(v)(B) to would be safe harbor QM loans under support, and DTI or residual income for accommodate a specific DTI limit. For this approach, and 96.1 percent would their ability-to-repay determination. example, the Bureau requests comment be QM loans. The Bureau requests Proposed § 1026.43(e)(2)(v)(B) and the on whether creditors that comply with comment on whether a DTI limit of up associated commentary explain how guidelines that have been revised but to 50 percent would be appropriate creditors must verify and count the are substantially similar to the guides under these hybrid approaches that consumer’s current or reasonably specified above should receive a safe incorporate pricing into the General QM expected income or assets other than the harbor, as the Bureau has proposed. The loan definition given that the pricing value of the dwelling (including any Bureau also seeks comment on its threshold would generally limit the real property attached to the dwelling) proposal to allow creditors to ‘‘mix and additional risk factors beyond the higher that secures the loan and the consumer’s match’’ verification standards, including DTI ratio. current debt obligations, alimony, and whether the Bureau should instead limit Another hybrid approach would child support, relying on the standards or prohibit such ‘‘mixing and matching’’ impose a DTI limit on all General QM set forth in the ATR requirements in under an approach that incorporates a loans but would allow higher DTI ratios § 1026.43(c). Proposed specific DTI limit. The Bureau requests for loans below a set pricing threshold. § 1026.43(e)(2)(v)(B) would further comment on whether these aspects of For example, the rule could generally provide creditors a safe harbor with the approach in proposed impose a DTI limit of 47 percent but standards the Bureau may specify for § 1026.43(e)(2)(v)(B), if used in could permit a loan with a DTI ratio up verifying debt and income. This could conjunction with a specific DTI limit, to 50 percent to be eligible for QM status potentially include relevant provisions would provide sufficient certainty to under the General QM loan definition if from the Fannie Mae Single Family creditors, investors, and assignees the APR is less than 2 percentage points Selling Guide, the Freddie Mac Single- regarding a loan’s QM status and over APOR. This approach might limit Family Seller/Servicer Guide, FHA’s whether it would result in potentially the likelihood of providing QM status to Single Family Housing Policy inconsistent application of the rule. loans for which the consumer lacks Handbook, the VA’s Lenders Handbook, VI. Section-by-Section Analysis ability to repay, but also would permit and USDA’s Field Office Handbook for some lower-priced loans with higher the Direct Single Family Housing 1026.43 Minimum Standards for DTI ratios to achieve QM status. Using Program and Handbook for the Single Transactions Secured by a Dwelling 2018 HDMA data, the Bureau estimates Family Guaranteed Loan Program, that 90.8 percent of conventional 43(b) Definitions current as of this proposal’s public purchase loans would be safe harbor release. The Bureau also is seeking 43(b)(4) QM loans under this approach, and 96.2 comments on potentially adding to the percent would be QM loans. The Bureau Section 1026.43(b)(4) provides the safe harbor other standards that external requests comment on whether these definition of a higher-priced covered stakeholders develop. hybrid approaches or a different hybrid transaction. It provides that a covered approach would better address concerns The Bureau requests comment on transaction is a higher-priced covered about access to credit and ensuring that whether the alternative method of transaction if the APR exceeds APOR for the General QM criteria support a defining debt and income in proposed a comparable transaction as of the date presumption that consumers have the § 1026.43(e)(2)(v)(B) could replace the interest rate is set by the applicable ability to repay their loans. appendix Q in conjunction with a rate spread specified in the Rule. For With respect to the Bureau’s concerns specific DTI limit. As noted above, the purposes of General QM loans under about appendix Q, the Bureau requests Bureau is concerned that this approach § 1026.43(e)(2), the applicable rate comment on an alternative method of that combines a general standard with spreads are 1.5 or more percentage defining debt and income the Bureau safe harbors may not be appropriate for points for a first-lien covered believes could replace appendix Q in a specific DTI limit. The Bureau transaction and 3.5 or more percentage conjunction with a specific DTI limit. requests comment on whether the points for a subordinate-lien covered As noted, the Bureau is concerned that approach in proposed transaction. Pursuant to § 1026.43(e)(1), the appendix Q definitions of debt and § 1026.43(e)(2)(v)(B) would address the a loan that satisfies the requirements of income are rigid and difficult to apply problems associated with appendix Q a qualified mortgage and is a higher- and do not provide the level of and would provide an alternative priced covered transaction under compliance certainty that the Bureau method of defining debt and income § 1026.43(b)(4) is eligible for a anticipated at the time of the January that would be workable with a specific rebuttable presumption of compliance 2013 Final Rule. Further, under the DTI limit. The Bureau seeks comment with the ATR requirements. A qualified current rule, some loans that would on whether allowing creditors to use mortgage that is not a higher-priced otherwise have DTI ratios below 43 standards the Bureau may specify to covered transaction is eligible for a percent do not satisfy the General QM verify debt and income—as would be conclusive presumption of compliance loan definition because their method of permitted under proposed with the ATR requirements. documenting and verifying income or § 1026.43(e)(2)(v)(B)—as well as The Bureau is proposing to revise debt is incompatible with appendix Q. potentially other standards external § 1026.43(b)(4) to create a special rule

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for purposes of determining whether circumvention or evasion thereof, or to 43(c) Repayment Ability certain types of General QM loans under facilitate compliance therewith. In 43(c)(4) Verification of Income or § 1026.43(e)(2) are higher-priced particular, it is the purpose of TILA Assets covered transactions. This special rule section 129C, as amended by the Dodd- TILA section 129C(a)(4) states that a would apply to loans for which the Frank Act, to assure that consumers are creditor making a residential mortgage interest rate may or will change within offered and receive residential mortgage loan shall verify amounts of income or the first five years after the date on loans on terms that reasonably reflect which the first regular periodic payment assets that such creditor relies on to their ability to repay the loans and that determine repayment ability, including will be due. For such loans, the creditor are understandable. would be required to determine the expected income or assets, by reviewing APR, for purposes of determining As also discussed above in part IV, the consumer’s Internal Revenue whether a QM under § 1026.43(e)(2) is TILA section 129C(b)(3)(B)(i) authorizes Service (IRS) Form W–2, tax returns, a higher-priced covered transaction, by the Bureau to prescribe regulations that payroll receipts, financial institution treating the maximum interest rate that revise, add to, or subtract from the records, or other third-party documents may apply during that five-year period criteria that define a QM upon a finding that provide reasonably reliable as the interest rate for the full term of that such regulations are necessary or evidence of the consumer’s income or the loan. proper to ensure that responsible, assets. In the January 2013 Final Rule, An identical special rule also would affordable mortgage credit remains the Bureau implemented this apply to loans for which the interest rate available to consumers in a manner requirement in § 1026.43(c)(4), which states that a creditor must verify the may or will change under proposed consistent with the purposes of section amounts of income or assets that the § 1026.43(e)(2)(vi), which would revise 129C, necessary and appropriate to the definition of a General QM loan creditor relies on under effectuate the purposes of section 129C § 1026.43(c)(2)(i) to determine a under § 1026.43(e)(2) to implement the and section 129B, to prevent price-based approach described in part consumer’s ability to repay a covered circumvention or evasion thereof, or to V. The section-by-section analysis of transaction using third-party records facilitate compliance with such section. proposed § 1026.43(e)(2)(vi) explains that provide reasonably reliable the Bureau’s reasoning for proposing The Bureau is proposing the special evidence of the consumer’s income or these rules. The special rules in the rule in § 1026.43(b)(4) regarding the assets. Section 1026.43(c)(4) further proposed revisions to § 1026.43(b)(4) APR determination of certain loans for states that a creditor may verify the and in proposed § 1026.43(e)(2)(vi) which the interest rate may or will consumer’s income using a tax-return would not modify other provisions in change pursuant to its authority under transcript issued by the IRS and lists Regulation Z for determining the APR TILA section 105(a) to make such several examples of other records the for other purposes, such as the adjustments and exceptions as are creditor may use to verify the disclosures addressed in or subject to necessary and proper to effectuate the consumer’s income or assets, including, among others, financial institution the commentary to § 1026.17(c)(1). purposes of TILA, including that records. Additionally, Proposed comment 43(b)(4)–4 consumers are offered and receive § 1026.43(e)(2)(v)(A) provides that a explains that provisions in subpart C, residential mortgage loans on terms that including commentary to General QM loan is a covered reasonably reflect their ability to repay § 1026.17(c)(1), address how to transaction for which the creditor the loans. The Bureau believes that determine the APR disclosures for considers and verifies at or before closed-end credit transactions and that these proposed provisions may ensure consummation the consumer’s current provisions in § 1026.32(a)(3) address that safe harbor QM status would not be or reasonably expected income or assets how to determine the APR to determine accorded to certain loans for which the other than the value of the dwelling coverage under § 1026.32(a)(1)(i). It interest rate may or will change that (including any real property attached to further explains that proposed pose a heightened risk of becoming the dwelling) that secures the loan in § 1026.43(b)(4) requires, only for unaffordable relatively soon after accordance with § 1026.43(c)(4), as well purposes of a QM under paragraph consummation. The Bureau is also as § 1026.43(c)(2)(i) and appendix Q. (e)(2), a different determination of the proposing these provisions pursuant to The Bureau is not proposing to APR for purposes of paragraph (b)(4) for its authority under TILA section change the text of § 1026.43(c)(4). The a loan for which the interest rate may 129C(b)(3)(B)(i) to revise and add to the Bureau is proposing to add comment or will change within the first five years statutory language. The Bureau believes 43(c)(4)–4, which would clarify that a after the date on which the first regular that the proposed APR determination creditor does not meet the requirements periodic payment will be due. It also provisions in § 1026.43(b)(4) may ensure of § 1026.43(c)(4) if it observes an inflow cross-references proposed comment that responsible, affordable mortgage of funds into the consumer’s account 43(e)(2)(vi)–4 for how to determine the credit remains available to consumers in without confirming that the funds are APR of such a loan for purposes of a manner consistent with the purpose of income. The proposed comment would § 1026.43(b)(4) and (e)(2)(vi). TILA section 129C, referenced above, as also state that, for example, a creditor As discussed above in part IV, TILA well as effectuate that purpose. would not meet the requirements of section 105(a), directs the Bureau to § 1026.43(c)(4) where it observes an prescribe regulations to carry out the The Bureau requests comment on all unidentified $5,000 deposit in the purposes of TILA, and provides that aspects of the proposed special rule that consumer’s account but fails to take any such regulations may contain additional would be required in proposed measures to confirm or lacks any basis requirements, classifications, § 1026.43(b)(4) to determine the APR for to conclude that the deposit represents differentiations, or other provisions, and certain loans for which the interest rate the consumer’s personal income and may provide for such adjustments and may or will change. See the section-by- not, for example, proceeds from the exceptions for all or any class of section analysis of proposed disbursement of a loan. (As described transactions that the Bureau judges are § 1026.43(e)(2)(vi) for specific data below in the section-by-section analysis necessary or proper to effectuate the requests and additional solicitation of of proposed § 1026.43(e)(2)(v), below, purposes of TILA, to prevent comments. the Bureau is also proposing to amend

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the verification requirements in the § 1026.43(e)(2)(v), the Bureau is current or reasonably expected income General QM loan definition.) proposing to require that creditors or assets, other than the value of the The Bureau is proposing to include consider the consumer’s DTI ratio or dwelling, including any real property this clarification as part of its effort to residual income and to remove the attached to the dwelling, that secures avoid potential compliance uncertainty appendix Q requirements from the loan (under § 1026.43(c)(2)(i)); the that could arise from the removal of § 1026.43(e)(2)(v). The Bureau consumer’s current debt obligations, appendix Q and from the resulting tentatively concludes that these alimony, and child support greater reliance on regulation text and proposed amendments necessitate (§ 1026.43(c)(2)(vi)); and the consumer’s commentary to define a creditor’s additional revisions to clarify a monthly DTI ratio or residual income in obligations to consider and verify a creditor’s obligation to consider and accordance with § 1026.43(c)(7). Section consumer’s income, assets, debt verify certain information under the 1026.43(c)(3) requires a creditor to obligations, alimony, and child support. General QM loan definition. verify the information the creditor relies (Other proposed revisions related to this Consequently, the Bureau is proposing on in determining a consumer’s effort are described below with respect to amend the consider and verify repayment ability using reasonably to § 1026.43(e)(2)(v).) The Bureau requirements in § 1026.43(e)(2)(v) and reliable third-party records, with a few understands, based on outreach and on its associated commentary. specified exceptions. Section its experience supervising creditors, that TILA section 129C contains several 1026.43(c)(3) further states that a this clarification could be useful to requirements that creditors consider and creditor must verify a consumer’s creditors because the Rule includes verify various types of information. In income and assets that the creditor ‘‘financial institution records’’ as one of the statute’s general ATR provisions, relies on in accordance with the examples of records that a creditor TILA section 129C(a)(1) requires that a § 1026.43(c)(4). Section 1026.43(c)(4) may use to verify a consumer’s income creditor make a reasonable and good requires that a creditor verify the or assets. As part of their underwriting faith determination, based on ‘‘verified amounts of income or assets that the process, creditors may seek to use and documented information,’’ that a creditor relies on to determine a transactions in electronic or paper consumer has a reasonable ability to consumer’s ability to repay a covered financial records such as consumer repay the loan. TILA section 129C(a)(3) transaction using third-party records account statements to examine inflows states that a creditor’s ATR that provide reasonably reliable and outflows from consumers’ accounts. determination shall include evidence of the consumer’s income or In many cases, there may be sufficient ‘‘consideration’’ of the consumer’s assets. It also provides examples of basis in transaction data alone, or in credit history, current income, expected records the creditor may use to verify combination with other information, to income the consumer is reasonably the consumer’s income or assets. determine that a deposit or other credit assured of receiving, current obligations, As noted in part V, the January 2013 to a consumer’s account represents DTI ratio or the residual income the Final Rule incorporated some aspects of income, such that a creditor’s use of the consumer will have after paying non- the general ATR standards into the data in an underwriting process is mortgage debt and mortgage-related General QM loan definition, including distinguishable from the example in the obligations, employment status, and the requirement to consider and verify proposed comment. The Bureau’s other financial resources other than the income or assets and debt obligations, preliminary view is that this consumer’s equity in the dwelling or alimony, and child support. Section clarification would help creditors real property that secures repayment of 1026.43(e)(2)(v) states that a General understand their verification the loan. TILA section 129C(a)(4) states QM loan is a covered transaction for requirements under the General QM that a creditor making a residential which the creditor considers and loan definition, given that proposed mortgage loan shall verify amounts of verifies at or before consummation: (A) comment 43(e)(2)(v)(B)–1 would explain income or assets that such creditor The consumer’s current or reasonably that a creditor must verify the relies on to determine repayment expected income or assets other than the consumer’s current or reasonably ability, including expected income or value of the dwelling (including any expected income or assets in accordance assets, by reviewing the consumer’s IRS real property attached to the dwelling) with § 1026.43(c)(4) and its Form W–2, tax returns, payroll receipts, that secures the loan, in accordance financial institution records, or other with appendix Q, § 1026.43(c)(2)(i), and commentary.241 The Bureau requests comment on this third-party documents that provide (c)(4); and (B) the consumer’s current proposed new comment. The Bureau reasonably reliable evidence of the debt obligations, alimony, and child also requests comment on whether consumer’s income or assets. Finally, in support in accordance with appendix Q, additional clarifications may be helpful the statutory QM definition, TILA § 1026.43(c)(2)(vi) and (c)(3). The with respect to cash flow underwriting section 129C(b)(2)(A)(iii) provides that, Bureau used its adjustment and and verifying whether inflows are for a loan to be a QM, the income and exception authority under TILA section income under the Rule. financial resources relied on to qualify 129C(b)(3)(B)(i) to require creditors to the obligors on the loan must be consider and verify the consumer’s debt 43(e) Qualified Mortgages ‘‘verified and documented.’’ obligations, alimony, and child support 43(e)(2) Qualified Mortgage Defined— In the January 2013 Final Rule, the pursuant to the General QM loan General Bureau implemented the requirements definition. to consider and verify various factors for The Bureau proposes to revise 43(e)(2)(v) the general ATR standard in § 1026.43(e)(2)(v) to separate and clarify As discussed above in part V, the § 1026.43(c)(2), (c)(3), (c)(4), and (c)(7). the requirements to consider and verify Bureau is proposing to remove the Section 1026.43(c)(2) states that—except certain information. Proposed specific DTI limit in § 1026.43(e)(2)(vi). as provided in certain other provisions § 1026.43(e)(2)(v)(A) would contain the Furthermore, as discussed below in this (including the General QM loan ‘‘consider’’ requirements, and proposed section-by-section analysis of proposed definition)—a creditor must consider § 1026.43(e)(2)(v)(B) would contain the several specified factors in making its ‘‘verify’’ requirements. Specifically, 241 See the section-by-section analysis for ATR determination. These factors proposed § 1026.43(e)(2)(v) would state proposed § 1026.43(e)(2)(v)(B). include, among others, the consumer’s that a General QM loan is a covered

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transaction for which the creditor: (A) assets, debt obligations, alimony, child creditors must verify income, assets, Considers the consumer’s income or support, and DTI or residual income debt obligations, alimony, and child assets, debt obligations, alimony, child may ease compliance uncertainty. support in accordance with the general support, and monthly DTI ratio or The Bureau is proposing to remove ATR verification provisions. residual income, using the amounts appendix Q and the requirement to use Specifically, § 1026.43(e)(2)(v)(B)(1) determined from § 1026.43(e)(2)(v)(B); appendix Q from the rule. The Bureau’s requires a creditor to verify the and (B) verifies the consumer’s current principal reason for adopting appendix consumer’s current or reasonably or reasonably expected income or assets Q in 2013 was to provide clear and expected income or assets (including other than the value of the dwelling specific standards for calculating a any real property attached to the value (including any real property attached to consumer’s debt, income, and DTI ratio of the dwelling) that secures the loan in the dwelling) that secures the loan using for purposes of comparison with the 43 accordance with § 1026.43(c)(4), which third-party records that provide percent DTI limit and to provide states that a creditor must verify such reasonably reliable evidence of the certainty about whether a loan meets the amounts using third-party records that consumer’s income or assets, in requirements for being a General QM provide reasonably reliable evidence of accordance with § 1026.43(c)(4), and the loan. As discussed in more detail below, the consumer’s income or assets. consumer’s current debt obligations, appendix Q has not provided clear and Section 1026.43(e)(2)(v)(B)(2) requires a alimony, and child support using specific standards, and the Bureau is creditor to verify the consumer’s current reasonably reliable third-party records proposing to remove the 43 percent DTI debt obligations, alimony, and child in accordance with § 1026.43(c)(3). The limit. Accordingly, the Bureau support in accordance with regulatory text would also state that, for preliminarily concludes that appendix § 1026.43(c)(3), which states that a purposes of § 1026.43(e)(2)(v)(A), the Q, and the requirement to use appendix creditor must verify such amounts using consumer’s monthly DTI ratio or Q to calculate DTI for purposes of the reasonably reliable third-party records. residual income is determined in General QM loan definition, should be So long as a creditor complies with the accordance with § 1026.43(c)(7), except removed from the Rule. However, provisions of § 1026.43(c)(3) with that the consumer’s monthly payment appendix Q currently serves the respect to debt obligations, alimony, and on the covered transaction, including additional function of specifying what a child support and § 1026.43(c)(4) with the monthly payment for mortgage- creditor must do to comply with the respect to income and assets, the related obligations, is calculated in requirements of § 1026.43(e)(2)(v) to creditor is permitted to use any accordance with § 1026.43(e)(2)(iv). consider and verify a consumer’s reasonable verification methods and income, assets, debt obligations, As noted above, the Bureau is criteria. By incorporating § 1026.43(c)(3) alimony, and child support. The Bureau and (c)(4) in § 1026.43(e)(2)(v)(B), the proposing to remove the specific 43 is concerned that the rule would create percent DTI limit in § 1026.43(e)(2)(vi) Bureau seeks to maintain in the General significant compliance uncertainty if it QM loan verification requirements the and the appendix Q requirement in merely removed appendix Q without § 1026.43(e)(2)(v). Given that these flexibility inherent to these ATR clarifying how a creditor can evaluate provisions. At the same time, the proposed amendments would change various types of income, assets, and how a creditor would satisfy the General Bureau seeks to provide greater debt. certainty to creditors regarding the QM loan definition, the Bureau is The Bureau’s objective in proposing General QM loan verification proposing to amend the consider and to clarify the § 1026.43(e)(2)(v) requirements by explaining that a verify requirements in requirements to consider a consumer’s creditor complies with § 1026.43(e)(2)(v). Under the Bureau’s income, assets, debt obligations, § 1026.43(e)(2)(v)(B) if it complies with proposal, the General QM loan alimony, and child support is to ensure definition would no longer include a that a loan for which a creditor any one of certain verification standards specific DTI limit in § 1026.43(e)(2)(vi), disregards these factors cannot obtain the Bureau would specify. but a creditor would be required to QM status, while ensuring that creditors The Bureau also proposes revisions to consider DTI or residual income, debt and investors can readily determine if a the commentary for § 1026.43(e)(2)(v). obligations, alimony, child support, and loan is a QM. The Bureau’s primary The Bureau proposes to remove income or assets under objective in clarifying the requirement comments 43(e)(2)(v)–2 and –3. In § 1026.43(e)(2)(v). The Bureau to verify a consumer’s income, assets, general, these comments currently tentatively concludes that providing debt obligations, alimony, and child clarify that creditors must consider and additional explanation of the proposed support is to provide reasonable verify any income as well as any debt requirement to consider this assurance that only income and assets or liability specified in appendix Q and information may ease compliance that exist or will exist are part of a that, while other income and debt may uncertainty. To meet the consider creditor’s ATR determination and that be considered and verified, such income requirement in § 1026.43(e)(2)(v)(A), the none of the consumer’s debt obligations, and debt would not be included in the proposal would require the creditor to alimony, and child support are DTI ratio determination required by use the amounts determined according excluded from consideration. The § 1026.43(e)(2)(vi). The Bureau to § 1026.43(e)(2)(v)(B). For example, if Bureau also aims to ensure that the preliminarily concludes that these the creditor relied on assets in its verification requirement provides comments would no longer be needed ability-to-repay determination, the substantial flexibility for creditors to in light of the proposed revisions to creditor could consider current and adopt innovative verification methods, § 1026.43(e)(2)(v). The first sentence of reasonably expected assets other than such as the use of bank account data each of these two comments merely the value of the dwelling (including any that identifies the source of deposits to restates language in the regulatory text. real property attached to the dwelling) determine personal income, while also The second sentence would no longer that secures the loan as calculated under specifying examples of compliant be needed because the Bureau is 1026.43(e)(2)(v)(B). The Bureau verification standards to provide greater proposing to remove references to tentatively concludes that providing certainty that a loan has QM status. appendix Q in § 1026.43(e)(2)(v). And additional explanation of the proposed As described above, proposed the third sentence would no longer be requirement to consider income or § 1026.43(e)(2)(v)(B) would provide that needed because the Bureau is proposing

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to remove the DTI limit in or assets, debt obligations, alimony, and mortgage loans on terms that reasonably § 1026.43(e)(2)(vi). child support, as determined under reflect their ability to repay the loan. Proposed § 1026.43(e)(2)(v)(A) would 43(e)(2)(v)(A) proposed § 1026.43(e)(2)(v)(B). The Bureau tentatively concludes that the require creditors to consider either a As explained above, the Bureau amounts considered under consumer’s monthly residual income or proposes to revise § 1026.43(e)(2)(v), § 1026.43(e)(2)(v)(A) should be DTI. The January 2013 Final Rule which currently includes the consistent with the amounts verified adopted a bright-line DTI limit for the requirement to consider and verify the according to § 1026.43(e)(2)(v)(B). For General QM loan definition under consumer’s reasonably expected income example, if the creditor relies on assets § 1026.43(e)(2)(vi), but the Bureau or assets, debt obligations, alimony, and in its ability-to-repay determination and concluded that it did not have enough child support, as part of the QM information to establish a bright-line seeks to comply with the consider definition. The Bureau is proposing to residual income limit as an alternative requirement under § 1026.43(e)(2)(v)(A), separate the consider and verify to the DTI limit.244 In comparison, TILA requirements in § 1026.43(e)(2)(v) into the creditor could consider current and and the January 2013 Final Rule allow § 1026.43(e)(2)(v)(A) for the ‘‘consider’’ reasonably expected assets other than creditors to consider either residual requirements and § 1026.43(e)(2)(v)(B) the value of the dwelling (including any income or DTI as part of the general for the ‘‘verify’’ requirements. The real property attached to the dwelling) ATR requirements in Bureau proposes to revise that secures the loan as calculated under § 1026.43(c)(2)(vii), and the June 2013 § 1026.43(e)(2)(v)(A) to provide that a 1026.43(e)(2)(v)(B). Final Rule allows small creditors General QM loan is a covered The Bureau is proposing the revision originating QM loans pursuant to transaction for which the creditor, at or to add DTI to ensure that, although the § 1026.43(e)(5) to consider DTI or before consummation, considers the Bureau is proposing to eliminate the residual income. Given the Bureau’s consumer’s income or assets, debt DTI limit in § 1026.43(e)(2)(vi), creditors proposal to eliminate the bright-line DTI obligations, alimony, child support, and still must consider DTI (or residual limit in § 1026.43(e)(2)(vi), comments monthly DTI ratio or residual income, income, as discussed below) as part of from stakeholders discussed in the using the amounts determined from the General QM loan definition. The January 2013 Final Rule regarding the proposed § 1026.43(e)(2)(v)(B). Bureau continues to believe that DTI is value of residual income in determining For purposes of § 1026.43(e)(2)(v)(A), 245 an important factor in assessing a ability to repay, and the Bureau’s the Bureau proposes to prescribe the determination in the June 2013 Final same method for the creditor to consumer’s ability to repay. Comments responding to the 2019 ANPR indicate Rule that residual income can be a calculate the consumer’s monthly valuable measure of ability to repay, the that creditors generally use DTI as part payment that is currently prescribed in Bureau tentatively concludes that of their underwriting process. These § 1026.43(e)(2)(vi), in which the allowing creditors the option to comments indicate that requiring as part consumer’s monthly DTI ratio is consider (but not requiring them to determined using the consumer’s of the General QM loan definition that consider) residual income in lieu of DTI monthly payment on the covered creditors consider DTI when would allow space for creditor transaction and any simultaneous loan determining a consumer’s ability to flexibility and innovation and is that the creditor knows or has reason to repay—even if the QM definition no necessary and proper to preserve access know will be made. The Bureau is longer includes a specific DTI limit— to responsible, affordable mortgage proposing to eliminate appendix Q and would be consistent with current market credit. the DTI limit in § 1026.43(e)(2)(vi). To practices. In a final rule issued in June The Bureau is proposing the make clear that any DTI calculation 2013 (June 2013 Final Rule), the Bureau requirement that the creditor consider must incorporate alimony and child created an exception from the DTI limit the consumer’s debt obligations, support—which is currently facilitated requirement for small creditors that alimony, child support, income or through appendix Q—the Bureau is hold QMs on portfolio.242 The Bureau assets, and monthly DTI or residual proposing to cross-reference the determined that, even though the DTI income under § 1026.43(e)(2)(A) § 1026.43(c)(7) requirements. In order to limit was not appropriate for a small pursuant to its adjustment and maintain the monthly DTI ratio creditor that holds loans on their calculation method from portfolio, DTI (or residual income) was 244 78 FR 6408, 6528 (Jan. 30, 2013) § 1026.43(e)(2)(vi)(B), the Bureau is still a fundamental part of the creditor’s (‘‘Unfortunately, however, the Bureau lacks sufficient data, among other considerations, to proposing to move the text prescribing 243 ATR determination. The Bureau mandate a bright-line rule based on residual income the calculation method from tentatively concludes that requiring at this time.’’). § 1026.43(e)(2)(vi)(B) to creditors to consider DTI as part of the 245 Id. at 6527 (‘‘Another consumer group § 1026.43(e)(2)(v)(A). The Bureau is QM definition is necessary and commenter argued that residual income should be proposing to expand the § 1026.43(c)(7) incorporated into the definition of QM. Several appropriate to ensure that consumers commenters suggested that the Bureau use the cross-reference and the monthly are offered and receive residential general residual income standards of the VA as a payment calculation method to residual model for a residual income test, and one of these income given that the proposal allows commenters recommended that the Bureau 242 78 FR 35430 (June 12, 2013). creditors the option of considering coordinate with FHFA to evaluate the experiences 243 Id. at 35487 (‘‘The Bureau continues to believe of the GSEs in using residual income in residual income in lieu of DTI. The that consideration of debt-to-income ratio or determining a consumer’s ability to repay.’’); id. at Bureau tentatively concludes that the residual income is fundamental to any 6528 (‘‘Finally, the Bureau acknowledges arguments reference to simultaneous loans is not determination of ability to repay. A consumer is that residual income may be a better measure of able to repay a loan if he or she has sufficient funds repayment ability in the long run. A consumer with necessary because the cross-reference to to pay his or her other obligations and expenses and a relatively low household income may not be able § 1026.43(c)(7) would require creditors still make the payments required by the terms of the to afford a 43 percent debt-to-income ratio because to consider simultaneous loans. loan. Arithmetically comparing the funds to which the remaining income, in absolute dollar terms, is Proposed § 1026.43(e)(2)(v)(A) would a consumer has recourse with the amount of those too small to enable the consumer to cover his or her revise existing § 1026.43(e)(2)(v) by funds the consumer has already committed to living expenses. Conversely, a consumer with a spend or is committing to spend in the future is relatively high household income may be able to requiring a creditor to consider DTI or necessary to determine whether sufficient funds afford a higher debt ratio and still live comfortably residual income in addition to income exist.’’). on what is left over.’’).

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exception authority under TILA section method for DTI and residual income is monthly DTI ratio or residual income in 129C(b)(3)(B)(i). The Bureau appropriate because it would assist its ATR determination. In making this preliminarily finds that this addition to creditors in complying with the determination, creditors must use the the General QM loan criteria is consider requirement and would assist amounts determined under the necessary and proper to ensure that in enforcement of the rule because it requirement to verify the consumer’s responsible, affordable mortgage credit would encourage consistency in DTI current or reasonably expected income remains available to consumers in a and residual income calculations. or assets and the consumer’s current manner that is consistent with the To clarify the proposed requirements debt obligations, alimony, and child purposes of TILA section 129C and in § 1026.43(e)(2)(v)(A), the Bureau support in § 1026.43(e)(2)(v)(B). The necessary and appropriate to effectuate proposes to add comments proposed comment would further the purposes of TILA section 129C, 43(e)(2)(v)(A)–1 to –3. The Bureau explain that, according to requirements which includes assuring that consumers proposes these new comments because in § 1026.25(a) to retain records showing are offered and receive residential they may be appropriate to ensure that compliance with the Rule, a creditor mortgage loans on terms that reasonably the rule’s requirement to consider the must retain documentation showing reflect their ability to repay the loan. consumer’s debt obligations, alimony, how it took into account these factors in The Bureau also incorporates this child support, income or assets, and DTI its ATR determination. By citing the requirement pursuant to its authority ratio or residual income is clear and record retention requirement, this under TILA section 105(a) to issue detailed enough to provide creditors comment would clarify that to comply regulations that, among other things, with sufficient certainty about whether with § 1026.43(e)(2)(v)(A) and obtain contain such additional requirements, a loan satisfies the General QM loan QM status, a creditor must document other provisions, or that provide for definition. Under the proposal, the how the required factors were taken into such adjustments for all or any class of General QM loan definition would no account in the creditor’s ATR transactions, that in the Bureau’s longer include a specific DTI limit in determination. If a creditor ignores the judgment are necessary or proper to § 1026.43(e)(2)(vi) and would require required factors of income or assets, effectuate the purposes of TILA, which instead that creditors consider DTI or debt obligations, alimony, child include the above purpose of section residual income, along with debt and support, and DTI or residual income— 129C. The Bureau preliminarily finds income. By requiring calculation of DTI or otherwise did not take them into that including consideration of DTI or and comparing that calculation to a DTI account as part of its ATR residual income in the General QM loan limit, the existing DTI limit provides determination—the loan would not be criteria is necessary and proper to fulfill creditors with a bright-line rule eligible for QM status. While creditors the purpose of assuring that consumers demonstrating how to consider the must take these factors into account and are offered and receive residential consumer’s income or assets, debt, and retain documentation of how they did mortgage loans on terms that reasonably DTI when making its ATR so, the Bureau emphasizes that creditors reflect their ability to repay the loan. determination. Without providing would have great latitude in how they The Bureau also believes that additional explanation of the proposed took these factors into account and that § 1026.43(e)(2)(A) is authorized by TILA requirement to consider DTI or residual they would be able to document how section 129C(b)(2)(A)(vi), which income, along with debt and income, they did so in a simple and non- permits, but does not require, the eliminating the DTI limit could create burdensome manner, such as a creditor compliance uncertainty that could leave Bureau to adopt guidelines or documenting that it followed its some creditors reluctant to originate QM regulations relating to debt-to-income standard procedures for considering loans to consumers and could allow ratios or alternative measures of ability these factors in connection with a other creditors to originate risky loans to pay regular expenses after payment of specific loan. As an example of the type without considering DTI or residual total monthly debt. of documents that a creditor might use income and still receive QM status. In to show that income or assets, debt The Bureau is proposing to revise addition, without additional obligations, alimony, child support, and § 1026.43(e)(2)(v)(A) to incorporate the explanation, it may be difficult to DTI or residual income were taken into monthly payment calculation method enforce the requirement to consider account, the proposed comment cites an from current § 1026.43(e)(2)(vi)(B). In income or assets, debt obligations, underwriter worksheet or a final order to preserve the incorporation of alimony, child support, and monthly alimony and child support in this DTI or residual income. Several ANPR automated underwriting system calculation—which currently is commenters requested that the Bureau certification, alone or in combination facilitated by appendix Q—the Bureau maintain the ‘‘consider’’ requirement in with the creditor’s applicable is proposing to cross-reference the the General QM loan definition and underwriting standards, that shows how requirement in § 1026.43(c)(7). The clarify this requirement. Accordingly, these required factors were taken into cross-reference also incorporates the Bureau tentatively concludes that it account in the creditor’s ability-to-repay simultaneous loans. Additionally, given is appropriate to provide additional determination. the proposal to allow creditors to explanation for the consider To reinforce that the QM definition no consider residual income in lieu of requirement in § 1026.43(e)(2)(v) in longer would include a specific DTI monthly DTI, the Bureau is proposing to proposed comments 43(e)(2)(v)(A)–1 to limit, proposed comment 43(e)(2)(v)(A)– apply this calculation requirement to –3. 2 explains that creditors have flexibility residual income. This proposed revision Proposed comment 43(e)(2)(v)(A)–1 in how they consider these factors and would ensure that the mortgage would explain that, in order to comply that the proposed rule does not payment and the payment on any with the requirement in prescribe a specific monthly DTI or simultaneous loans are included in a § 1026.43(e)(2)(v)(A) to consider income residual income threshold. To assist manner consistent with or assets, debt obligations, alimony, creditors, the Bureau is proposing two § 1026.43(e)(2)(iv) both when a creditor child support, and DTI ratio or residual examples of how to comply with the considers DTI or residual income. The income, a creditor must take into requirement to consider DTI. Proposed Bureau tentatively concludes that account income or assets, debt comment 43(e)(2)(v)(A)–2 provides an requiring this pre-existing calculation obligations, alimony, child support, and example in which a creditor considers

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monthly DTI or residual income by related commentary. The Bureau Given these concerns, the Bureau also establishing monthly DTI or residual specifically seeks comment on whether seeks comment on whether proposed income thresholds for its own the proposed commentary provides § 1026.43(e)(2)(v)(A) and its associated underwriting standards and sufficient clarity as to what creditors commentary sufficiently address the documenting how those thresholds were must do to comply with the requirement risk that loans with a DTI that is so high applied to determine the consumer’s to consider income or assets, debt or residual income that is so low that a ability to repay. Given that some obligations, alimony, child support, and consumer may lack ability to repay can creditors use several thresholds that DTI or residual income, and whether it obtain QM status. In particular, the depend on any relevant compensating creates impediments to consideration of Bureau seeks comment on whether the factors, the Bureau is also proposing a other factors or data in making an ATR Rule should provide examples in which second example. The second example in determination. The Bureau also seeks a creditor has not considered the the comment would provide that a comment on whether it should retain required factors and, if so, what may be creditor may also consider DTI or the monthly payment calculation appropriate examples. The Bureau also residual income by establishing method for DTI, which it is proposing requests comment on whether the Rule monthly DTI or residual income to move from § 1026.43(e)(2)(vi)(B) to should provide that a creditor does not thresholds and exceptions to those proposed § 1026.43(e)(2)(v)(A). appropriately consider DTI or residual thresholds based on other compensating The Bureau is proposing revisions to income if a very high DTI ratio or low factors, and documenting application of § 1026.43(e)(2)(v)(A) and related residual income indicates that the the thresholds along with any commentary as part of the proposal to consumer lacks ability to repay but the applicable exceptions. The Bureau eliminate the specific DTI limit. In creditor disregards this information and tentatively concludes that both amending the General QM loan instead relies on the consumer’s examples are consistent with current definition under § 1026.43(e)(2), Bureau expected or present equity in the market practices and therefore is concerned about balancing various dwelling, such as might be identified providing these examples would clarify factors, including the need for clarity through the consumer’s LTV ratio. The a loan’s QM status without imposing a regarding QM status and for flexibility Bureau also requests comment on significant burden on the market. as market underwriting practices evolve, whether the Rule should specify which The Bureau is aware that some while also trying to ensure that creditors compensating factors creditors may or creditors look to factors in addition to making loans that receive QM status may not rely on for purposes of income or assets, debt obligations, have considered the consumers’ determining the consumer’s ability to alimony, child support, and DTI or financial capacity and thus should repay. The Bureau also seeks comment residual income in determining a receive a presumption of compliance on the tradeoffs of addressing these consumer’s ability to repay. For with the ATR requirements. In ability-to-repay concerns with example, the Bureau is aware that some particular, the Bureau is concerned undermining the clarity of a loan’s QM creditors may look to net cash flow into about the potential that the price-based status. The Bureau also seeks comment a consumer’s deposit account as a approach may permit some loans to on the impact of the COVID–19 method of residual income analysis. As receive QM status, even if creditors may pandemic on how creditors consider the Bureau understands it, a net cash have originated those loans without income or assets, debt obligations, flow calculation typically consists of meaningfully considering the alimony, child support, and monthly residual income, further reduced by consumer’s financial capacity because DTI ratio or residual income. consumer expenditures other than those they believe their risk of loss may be already subtracted from income in limited by factors like a rising housing 43(e)(2)(v)(B) calculating the consumer’s residual price environment or the consumer’s For the reasons discussed below, the income. Accordingly, the result of a net existing equity in the home. As Bureau proposes to revise cash flow calculation may be useful in discussed in the January 2013 Final § 1026.43(e)(2)(v)(B) to provide that a to assessing the adequacy of a particular Rule, the Bureau is aware of concerns General QM loan is a covered consumer’s residual income. about creditors relying on factors related transaction for which the creditor, at or Proposed comment 43(e)(2)(v)(A)–3 to the value of the dwelling, like LTV before consummation, verifies the would explain that the requirement in ratio, and how such reliance may have consumer’s current or reasonably § 1026.43(e)(2)(v)(A) to consider income contributed to the mortgage crisis.246 expected income or assets other than the or assets, debt obligations, alimony, value of the dwelling (including any child support, and monthly DTI or 246 See id. at 6561 (Jan. 30, 2013) (‘‘In some cases, real property attached to the dwelling) residual income does not preclude the lenders and borrowers entered into loan contracts creditor from taking into account on the misplaced belief that the home’s value that secures the loan using third-party additional factors that are relevant in would provide sufficient protection. These cases included subprime borrowers who were offered parties. For very low LTV mortgages, i.e., those making its ability-to-repay loans because the lender believed that the house where the value of the property more than covers determination. The proposed comment value either at the time of origination or in the near the value of the loan, the lender may not care at further provides that creditors may look future could cover any default. Some of these all if the borrower can afford the payments. Even to comment 43(c)(7)–3 for guidance on borrowers were also counting on increased housing for higher LTV mortgages, if prices are rising values and a future opportunity to refinance; others sharply, borrowers with even limited equity in the considering additional factors in likely understood less about the transaction and home may be able to gain financing since lenders determining the consumer’s ATR. were at an informational disadvantage relative to can expect a profitable sale or refinancing of the Comment 43(c)(7)–3 explains that the lender.’’); id. at 6564 (‘‘During those periods property as long as prices continue to rise.... In creditors may consider additional there were likely some lenders, as evidenced by the all these cases, the common problem is the failure existence of no-income, no-asset (NINA) loans, that of the originator or creditor to internalize particular factors when determining a consumer’s used underwriting systems that did not look at or costs, often magnified by information failures and ability to repay and provides an verify income, debts, or assets, but rather relied systematic biases that lead to underestimation of example of looking to consumer assets primarily on credit score and LTV.’’); id. at 6559 (‘‘If the risks involved. The first such costs are simply other than the value of the dwelling, the lender is assured (or believes he is assured) of the pecuniary costs from a defaulted loan—if the recovering the value of the loan by gaining loan originator or the creditor does not bear the such as a savings account. possession of the asset, the lender may not pay ultimate credit risk, he or she will not invest The Bureau seeks comment on sufficient attention to the ability of the borrower to sufficiently in verifying the consumer’s ability to proposed § 1026.43(e)(2)(v)(A) and the repay the loan or to the impact of default on third repay.’’).

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records that provide reasonably reliable would enable creditors to take into exclude particular inflows, property, evidence of the consumer’s income or account the effects of public and obligations as income, assets, debt assets, in accordance with emergencies that affect consumers’ obligations, alimony, and child support. § 1026.43(c)(4) and verifies the incomes when verifying a particular For example, such requirements would consumer’s current debt obligations, consumer’s income. These proposed include a specified standard’s definition alimony, and child support using comments would clarify that of the term ‘‘self-employment income,’’ reasonably reliable third-party records § 1026.43(e)(2)(v)(B) does not prescribe description of when the creditor may in accordance with § 1026.43(c)(3). precisely how creditors must verify the use self-employment income as To clarify this requirement, the consumer’s income or assets, debt qualifying income for a mortgage, and Bureau proposes to add comments obligations, alimony, and child explanation of how the creditor must 43(e)(2)(v)(B)–1 through –3. Proposed support—merely that they must do so document self-employment income. comment 43(e)(2)(v)(B)–1 would explain using third-party records that are Proposed comment 43(e)(2)(v)(B)–3.iii that § 1026.43(e)(2)(v)(B) does not reasonably reliable. As such, creditors would clarify that, for purposes of prescribe specific methods of would have the flexibility to adjust their compliance with § 1026.43(e)(2)(v)(B), a underwriting that creditors must use. It verification methods in the event of an creditor need not comply with would provide that emergency, such as the COVID–19 requirements in the standards listed in § 1026.43(e)(2)(v)(B)(1) requires a pandemic, that affects consumer comment 43(e)(2)(v)(B)–3.i other than creditor to verify the consumer’s current incomes. those that require creditors to verify or reasonably expected income or assets Proposed comment 43(e)(2)(v)(B)–3.i income, assets, debt obligations, (including any real property attached to would explain further that a creditor alimony, and child support using the value of the dwelling) that secures also complies with § 1026.43(e)(2)(v)(B) specified documents or to classify the loan in accordance with if it satisfies one of the specific particular inflows, property, and § 1026.43(c)(4), which states that a verification standards the Bureau would obligations as income, assets, debt creditor must verify such amounts using set forth in the rule. These standards obligations, alimony, and child support. third-party records that provide may include relevant provisions in For example, a standard the Bureau reasonably reliable evidence of the specified versions of the Fannie Mae would specify may include information consumer’s income or assets. The Single Family Selling Guide,247 the on the use of DTI ratios. Because such proposed comment would provide Freddie Mac Single-Family Seller/ information is not a requirement to further that § 1026.43(e)(2)(v)(B)(2) Servicer Guide,248 the FHA’s Single verify income, assets, debt obligations, requires a creditor to verify the Family Housing Policy Handbook,249 alimony and child support using consumer’s current debt obligations, the VA’s Lenders Handbook,250 and the specified documents or to classify alimony, and child support in USDA’s Field Office Handbook for the particular inflows, property, and accordance with § 1026.43(c)(3), which Direct Single Family Housing obligations as income, assets, debt states that a creditor must verify such Program 251 and the Handbook for the obligations, alimony, and child support, amounts using reasonably reliable third- Single Family Guaranteed Loan a creditor would need not comply with party records. Proposed comment Program, current as of the date of this this requirement to be eligible to receive 43(e)(2)(v)(B)–1 would then clarify that, proposal’s public release.252 The Bureau a safe harbor as described in comment so long as a creditor complies with the seeks comment on whether these or 43(e)(2)(v)(B)–3.i. Proposed comment 43(e)(2)(v)(B)–3.iv provisions of § 1026.43(c)(3) with other verification standards should be respect to debt obligations, alimony, and would clarify that a creditor also incorporated into proposed comment child support and § 1026.43(c)(4) with complies with § 1026.43(e)(2)(v)(B) if it 43(e)(2)(v)(B)–3.i. respect to income and assets, the complies with revised versions of Proposed comment 43(e)(2)(v)(B)–3.ii creditor is permitted to use any standards that the Bureau would specify would clarify that a creditor complies reasonable verification methods and in comment 43(e)(2)(v)(B)–3, provided with § 1026.43(e)(2)(v)(B) if it complies criteria. that the two versions are substantially Proposed comment 43(e)(2)(v)(B)–2 with requirements in the standards similar. This provision is intended to would clarify that ‘‘current and listed in comment 43(e)(2)(v)(B)–3 for allow creditors to use new versions of reasonably expected income or assets creditors to verify income or assets, debt standards without the Bureau needing other than the value of the dwelling obligations, alimony and child support to amend the commentary unless the (including any real property attached to using specified guides or to include or new versions of the standards deviate in the dwelling) that secures the loan’’ is important respects from the older 247 Fed. Nat’l Mortgage Assoc., Single Family determined in accordance with Selling Guide (2020), https://selling- versions of the standards. § 1026.43(c)(2)(i) and its commentary guide.fanniemae.com/. Finally, proposed comment and that ‘‘current debt obligations, 248 Fed. Home Loan Mort. Corp., The Single- 43(e)(2)(v)(B)–3.v would clarify that a alimony, and child support’’ has the Family Seller/Servicer Guide (2020), https:// creditor complies with same meaning as under guide.freddiemac.com/app/guide/. § 1026.43(e)(2)(v)(B) if it complies with 249 U.S. Dep’t of Hous. & Urban Dev., Single the verification requirements in one or § 1026.43(c)(2)(vi) and its commentary. Family Housing Policy Handbook 4000.1 (2019), The proposed comment would further https://www.hud.gov/program_offices/housing/sfh/ more of the standards the Bureau would clarify that § 1026.43(c)(2)(i) and (vi) handbook_4000-1. specify in comment 43(e)(2)(v)(B)–3.i. and the associated commentary apply to 250 U.S. Dept. of Veterans Affairs, Lenders The proposed comment would provide Handbook-VA Pamphlet 26–7 (2019), https:// further that a creditor may, but need a creditor’s determination with respect _ to what inflows and property it may www.benefits.va.gov/WARMS/pam26 7.asp. not, comply with § 1026.43(e)(2)(v)(B) 251 U.S. Dep’t of Agric. Rural Hous. Serv., Direct classify and count as income or assets Single Family Housing Loans and Grants-Field by complying with the verification and what obligations it must classify Office Handbook HB–1–3550 (2019), https:// requirements from more than one and count as debt obligations, alimony, www.rd.usda.gov/resources/directives/ standard (in other words, by ‘‘mixing and child support, pursuant to its handbooks#hb13555. and matching’’ verification 252 U.S. Dep’t of Agric. Rural Hous. Serv., compliance with § 1026.43(e)(2)(v)(B). Guaranteed Loan Program Technical Handbook requirements). For example, if a creditor The Bureau notes that proposed HB–1–3555 (2020), https://www.rd.usda.gov/ complies with the requirements in one comments 43(e)(2)(v)(B)–1 and –2 resources/directives/handbooks#hb13555. of the standards the Bureau would

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specify for when the creditor may use to consumers.253 However, appendix Q changing market conditions. ‘‘self-employment income,’’ and also has not achieved this goal. The Commenters suggested that the Bureau complies with the requirements in a Assessment Report highlighted three supplement appendix Q or replace it different standard the Bureau would concerns with appendix Q. First, the with reasonable alternatives that allow specify regarding certain vested assets, Report stated that appendix Q lacks the for more flexibility, such as a general the creditor complies with high degree of specific detail that is reasonability standard for verifying § 1026.43(e)(2)(v)(B) and receives a safe provided by, for example, Fannie Mae’s income and debt or verification harbor as described in comment Seller Guide and Freddie Mac’s Seller/ standards issued by the GSEs, FHA, 43(e)(2)(v)(B)–3.i with respect to those Servicer Guide.254 Second, the Report USDA, or VA. Commenters also stated determinations. A creditor that chooses noted that there is a perceived lack of that appendix Q hampers innovation to comply with the verification clarity in appendix Q. As the Report because it is incompatible with requirements from more than one noted, commenters on the Assessment practices such as digital underwriting. standard need not satisfy all of the RFI stated that appendix Q ‘‘is Although most commenters advocated verification requirements in each of the ambiguous and leads to uncertainty’’ for elimination of appendix Q, the standards it uses. and is ‘‘confusing and unworkable,’’ and commenters that advocated for retaining The Bureau proposes these revisions that ‘‘additional guidance . . . is appendix Q generally suggested the because it preliminarily concludes that needed.’’ 255 Third, the Report noted Bureau should revise appendix Q to they may help ensure that the Rule’s that appendix Q has been static since its modernize the standards and ease verification requirements are clear and adoption, while the GSEs regularly industry compliance. detailed enough to provide creditors update and adjust their guidelines in The Bureau tentatively determines with sufficient certainty about whether response to, among other things, that, due to the well-founded and a loan satisfies the General QM loan emerging issues with respect to the consistent concerns described above, definition. Without such certainty, treatment of certain types of debt or appendix Q does not provide sufficient creditors may be less likely to provide income.256 The Assessment Report compliance certainty to creditors and General QM loans to consumers, found that such concerns ‘‘may have does not provide flexibility to adapt to reducing the availability of responsible, contributed to investors’—and at least emerging issues with respect to the affordable mortgage credit to consumers. derivatively, creditors’—preference’’ for treatment of certain types of debt or The Bureau also seeks to ensure that the Temporary GSE QM loans instead of income categories. The Bureau Rule’s verification requirements are originating loans under the General QM recognizes that some findings in the flexible enough to adapt to emerging loan definition.257 Commenters Assessment Report suggest that the issues with respect to the treatment of responding to the ANPR also raised issues raised by creditors with respect to certain types of debt or income, similar concerns, but some commenters appendix Q do not appear to have had advancing the provision of responsible, also recommended maintaining a substantial impact for certain loans. affordable credit to consumers. appendix Q as an option for For example, although creditors have To further these objectives, the compliance. stated that it may be difficult to comply Bureau is proposing to remove the As described above in part III, the with certain appendix Q requirements requirement that creditors verify the ANPR solicited comment on whether for self-employed borrowers, the consumer’s income or assets, debt the rule should retain appendix Q as the Assessment Report noted that obligations, alimony, and child support standard for calculating and verifying application data indicated that the in accordance with appendix Q and to debt and income.258 Nearly all approval rates for non-high DTI, non- add commentary clarifying that a commenters agreed that appendix Q in GSE eligible self-employed borrowers creditor complies with its existing form is insufficient— have decreased by only two percentage § 1026.43(e)(2)(v)(B) if it complies with specifically, that the requirements points since the January 2013 Final Rule verification standards the Bureau would lacked clarity in certain areas, became effective.259 The Bureau specify. The Bureau encourages particularly with respect to the tentatively concludes, however, that this stakeholders to develop additional application of the standards to limited decrease in approvals for such verification standards that the Bureau consumers who are self-employed or applications does not undermine could incorporate into the safe harbor otherwise have non-traditional income. creditors’ concerns that appendix Q’s set forth in proposed comment These commenters stated that this lack definitions of debt and income are rigid 43(e)(2)(v)(B)–3. Stakeholder standards of clarity leaves creditors uncertain of and difficult to apply and do not also could incorporate, in whole or in the QM status of some loans. provide the level of compliance part, any standards that the Bureau Commenters also criticized appendix Q certainty that the Bureau anticipated in specifies as providing a safe harbor, for being overly prescriptive and the January 2013 Final Rule. including mixing and matching these outdated in other areas and therefore Additionally, the Assessment Report standards. The Bureau thus welcomes lacking the flexibility to adapt to showed that about 40 percent of the submission of stakeholder- respondents to a lender survey developed verification standards and 253 78 FR 6408, 6523 (Jan. 30, 2013). indicated that they ‘‘often’’ or would review any such standards for 254 See Assessment Report, supra note 58, at 193. ‘‘sometimes’’ originate non-QM loans potential inclusion in the safe harbor. 255 Id. where the borrower could not provide In the January 2013 Final Rule, the 256 Id. at 193–94. documentation required by appendix Q. Bureau adopted the requirement that 257 Id. at 193. The Bureau concluded that these results creditors verify the consumer’s income 258 Specifically, the Bureau sought comment on whether the rule should retain appendix Q as the left open the possibility that appendix Q or assets, debt obligations, alimony, and standard for verification if the rule retains a direct requirements may have had an impact child support in accordance with measure of a consumer’s personal finances for on access to credit.260 appendix Q. The Bureau believed this General QM. Even though the Bureau is proposing The Bureau thus proposes to remove requirement would provide certainty to to remove the DTI ratio requirement, the question the appendix Q requirements from about retention of appendix Q remains relevant creditors as to whether a loan meets the because the proposal would require creditors to General QM loan definition and would verify income, assets, debt obligations, alimony, 259 See Assessment Report, supra note 58, at 11. not deter creditors from providing QMs and child support. 260 See id. at 155.

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§ 1026.43(e)(2)(v), and to remove available to the public for free online.261 with the verification requirements of appendix Q from Regulation Z entirely. As discussed above, the Bureau is also § 1026.43(e)(2)(v)(B), consistent with The Bureau proposes to remove open to including stakeholder- § 1026.43(c)(3) and (c)(4) and their appendix Q entirely in light of concerns developed verification standards among commentary, an option that the Bureau from creditors and investors that its this list of guides such that a creditor’s intends to address the concerns of perceived inflexibility, ambiguity, and compliance with such verification creditors and commenters that found static nature result in standards that are standards would provide conclusive appendix Q to be too rigid or both confusing and outdated. The evidence of compliance with prescriptive. As explained in proposed Bureau understands it would be time- § 1026.43(e)(2)(v)(B). comment 43(e)(2)(v)(B)–1, and resource-intensive to revise The Bureau tentatively determines, § 1026.43(e)(2)(v)(B) does not prescribe appendix Q in a manner that would based on extensive public feedback and specific methods of underwriting, and resolve these concerns. The Bureau its own experience and review, that so long as a creditor complies with tentatively concludes that a more external standards appear reasonable § 1026.43(c)(3) and (c)(4), the creditor is efficient and practicable solution is to and would provide creditors with permitted to use any reasonable propose to remove appendix Q entirely. substantially greater certainty about verification methods and criteria. whether many loans satisfy the General Furthermore, as proposed comment As described above, the proposal QM loan definition—particularly with 43(e)(2)(v)(B)–3.v would clarify, would instead provide that creditors respect to verifying income for self- creditors would have the flexibility to must verify income, assets, debt employed consumers, consumers with ‘‘mix and match’’ the verification obligations, alimony, and child support part-time employment, and consumers requirements in the standards the in accordance with the general ATR with irregular or unusual income Bureau would specify in comment verification provisions. The proposal streams. The Bureau tentatively 43(e)(2)(v)(B)–3.i, and receive a safe would also provide a safe harbor for determines that these types of income harbor with respect to verification that compliance with § 1026.43(e)(2)(v)(B) if would be addressed more fully by is made consistent with those standards. a creditor complies with verification certain external standards than by The Bureau also proposes to explain requirements in standards the Bureau appendix Q. The Bureau tentatively in proposed comment 43(e)(2)(v)(B)–3.iv would specify in comment determines that, as a result, this that a creditor complies with 43(e)(2)(v)(B)–3. Because the Bureau proposal would increase access to § 1026.43(e)(2)(v)(B) if it complies with believes that the general ATR responsible, affordable credit for revised versions of the standards the verification provisions and external consumers. Bureau would specify in comment standards the Bureau would specify The Bureau emphasizes that a creditor 43(e)(2)(v)(B)–3.i, provided that the two would provide a workable approach, would not be required to comply with versions are substantially similar. Many and because the Bureau preliminarily any of the verification requirements in of the standards that the Bureau could agrees that the existing concerns with the standards the Bureau would specify specify in comment 43(e)(2)(V)(B)–3.i, appendix Q discussed above have merit, in comment 43(e)(2)(v)(B)–3.i in order to such as GSE and Federal agency the Bureau is not proposing to retain comply with § 1026.43(e)(2)(v)(B). standards, are regularly updated in appendix Q as an option for creditors to Rather, the Bureau is proposing to response to emerging issues with comply with the requirements of clarify that compliance with these respect to the treatment of certain types § 1026.43(e)(2)(v) to consider and verify standards constitutes compliance with of debt or income. This proposed a consumer’s income, assets, debt the verification requirements of comment would explain that the safe obligations, alimony, and child support. § 1026.43(c)(3) and (c)(4) and their harbor described in comment As proposed comment 43(e)(2)(v)(B)–1 commentary, which generally require 43(e)(2)(v)(B)–3.i applies not only to makes clear, creditors would still be creditors to verify income, assets, debt verification requirements in the specific required to verify the consumer’s obligations, alimony, and child support versions of the standards listed, but also income or assets in accordance with using reasonably reliable third-party revised versions of these standards, as § 1026.43(c)(4) and its commentary and records. The Bureau tentatively long as the revised version is verify the consumer’s current debt determines that this would help address substantially similar. obligations, alimony, and child support the concerns of many creditors and The Bureau is aware, based on in accordance with § 1026.43(c)(3) and commenters that appendix Q has not comments received on the ANPR, that its commentary. facilitated adequate compliance some creditors would prefer that certainty. compliance with any future version of As noted above, the proposal would The Bureau also tentatively the standards the Bureau specifies, also provide a safe harbor for determines that the proposal would rather than just the versions of those compliance with § 1026.43(e)(2)(v)(B) provide creditors with the flexibility to standards the Bureau would specify in where a creditor complies with develop other methods of compliance comment 43(e)(2)(v)(B)–3.i (as well as verification requirements in standards any substantially similar version, under the Bureau specifies. These may include 261 The current versions of the guides (as of June proposed comment 43(e)(2)(v)(B)–3.iv), relevant provisions from Fannie Mae’s 17, 2020) are available on the respective Federal be automatically deemed to constitute Single Family Selling Guide, Freddie agency and GSE websites. The current versions of the Federal agency guides noted above will be compliance with the verification Mac’s Single-Family Seller/Servicer posted with the proposed rule on https:// requirements of § 1026.43(c)(3) and Guide, FHA’s Single Family Housing www.regulations.gov. In the event that the GSEs (c)(4). However, such an approach Policy Handbook, the VA’s Lenders replace the current versions of the guides noted would mean that any future revisions to Handbook, and the USDA’s Field Office above with new versions of the guides on their websites during the comment period, the version those standards by the third parties that Handbook for the Direct Single Family current as of June 17, 2020 of Fannie Mae’s Single issue them could cause significant Housing Program as well as its Family Selling Guide will be available at http:// changes in the creditor obligations and Handbook for the Single Family www.allregs.com/tpl/public/fnma_freesiteconv_ consumer protections under the Rule Guaranteed Loan Program, current as of tll.aspx, and the version current as of June 17, 2020 without review by the Bureau. For this this proposal’s public release. All of of Freddie Mac’s Single-Family Seller/Servicer Guide will be available at https://www.allregs.com/ reason, the Bureau is not proposing these verification standards are tpl/public/fhlmc_freesite_tll.aspx. such an approach.

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As in the January 2013 Final Rule, the to pay regular expenses after payment of requirements from verification Bureau is proposing to incorporate the total monthly debt. standards, including whether examples requirement that the creditor verify the The Bureau seeks comment on of such ‘‘mixing and matching’’ would consumer’s current debt obligations, proposed § 1026.43(e)(2)(v)(B) and be helpful and whether the Bureau alimony, and child support into the related commentary, including on should instead limit or prohibit such definition of a General QM loan in whether it should retain appendix Q as ‘‘mixing and matching,’’ and why. § 1026.43(e)(2) pursuant to its authority an option for complying with the Rule’s Finally, the Bureau requests comment under TILA section 129C(b)(3)(B)(i). The verification standards. In addition, the on whether the Bureau should specify Bureau is also proposing the revisions to Bureau requests comment on whether in the safe harbor existing stakeholder the commentary to proposed § 1026.43(e)(2)(v)(B) and standards or standards that stakeholders § 1026.43(e)(2)(v)(B)—including the related commentary would facilitate or develop that define debt and income. clarification that a creditor complies create obstacles to verification of The Bureau seeks comment on whether with the General QM loan verification income, assets, debt obligations, the potential inclusion or non-inclusion of Federal agency or GSE verification requirement where it complies with alimony, and child support through standards in the safe harbor in the certain verification standards issued by automated analysis of electronic future would further encourage third parties that the Bureau would transaction data from consumer account stakeholders to develop such standards. specify—pursuant to its authority under records. The Bureau also requests TILA section 129C(b)(3)(B)(i). The comment on whether the Rule should 43(e)(2)(vi) Bureau tentatively finds that these include a safe harbor for compliance TILA section 129C(b)(2)(vi) states that provisions would be necessary and with certain verification standards, as the term ‘‘qualified mortgage’’ includes proper to ensure that responsible, the Bureau proposes in proposed any mortgage loan that complies with affordable mortgage credit remains comment 43(e)(2)(v)(B)–3, and, if so, any guidelines or regulations available to consumers in a manner that what verification standards the Bureau established by the Bureau relating to is consistent with the purposes of TILA should specify for the safe harbor. The ratios of total monthly debt to monthly section 129C and necessary and Bureau also requests comment about the income or alternative measure of ability appropriate to effectuate the purposes of advantages and disadvantages of the to pay regular expenses after payment of TILA section 129C, which includes verification requirements in each total monthly debt, taking into account assuring that consumers are offered and possible standard the Bureau could the income levels of the consumer and receive residential mortgage loans on specify for the safe harbor, including: (1) such other factors as the Bureau may terms that reasonably reflect their ability Chapters B3–3 through B3–6 of the determine relevant and consistent with to repay the loan. Fannie Mae Single Family Selling the purposes described in TILA section Guide, published June 3, 2020; (2) 129C(b)(3)(B)(i). TILA section The Bureau also proposes these sections 5102 through 5500 of the provisions pursuant to its authority 129C(b)(3)(B)(i) authorizes the Bureau to Freddie Mac Single-Family Seller/ revise, add to, or subtract from the under TILA section 105(a) to issue Servicer Guide, published June 10, criteria that define a QM upon a finding regulations that, among other things, 2020; (3) sections II.A.1 and II.A.4–5 of that the changes are necessary or proper contain such additional requirements, the FHA’s Single Family Housing Policy to ensure that responsible, affordable other provisions, or that provide for Handbook, issued October 24, 2019; (4) mortgage credit remains available to such adjustments for all or any class of chapter 4 of the VA’s Lenders consumers in a manner consistent with transactions, that in the Bureau’s Handbook, revised February 22, 2019; the purposes of TILA section 129C, judgment are necessary or proper to (5) chapter 4 of the USDA’s Field Office necessary and appropriate to effectuate effectuate the purposes of TILA, which Handbook for the Direct Single Family the purposes of TILA sections 129C and include the above purpose of section Housing Program, revised March 15, 129B, to prevent circumvention or 129C, among other things. The Bureau 2019; and (6) chapters 9 through 11 of evasion thereof, or to facilitate tentatively finds that these provisions the USDA’s Handbook for the Single compliance with TILA sections 129C would be necessary and proper to Family Guaranteed Loan Program, and 129B. Current § 1026.43(e)(2)(vi) achieve this purpose. In particular, the revised March 19, 2020. In addition, the implements TILA section 129C(b)(2)(vi), Bureau tentatively finds that Bureau requests comment on whether consistent with TILA section incorporating the requirement that a creditors that comply with standards 129C(b)(3)(B)(i), and provides that, as a creditor verify a consumer’s current that have been revised but are condition to be a General QM loan debt obligations, alimony, and child substantially similar should receive a under § 1026.43(e)(2), the consumer’s support into the General QM loan safe harbor, as the Bureau proposes. The total monthly DTI ratio may not exceed criteria—as well as clarifying that a Bureau further seeks comment on 43 percent. Section 1026.43(e)(2)(vi) creditor complies with the General QM whether the Rule should include further provides that the consumer’s verification requirement where it examples of revisions that might qualify total monthly DTI ratio is generally complies with certain verification as substantially similar, and if so, what determined in accordance with standards issued by third parties that types of examples would provide appendix Q. the Bureau would specify—would helpful clarification to creditors and For the reasons described in part V ensure that creditors verify whether a other stakeholders. For example, the above, the Bureau is proposing to consumer has the ability to repay a Bureau seeks comment on whether it remove the 43 percent DTI limit in General QM loan. Finally, the Bureau would be helpful to clarify that a current § 1026.43(e)(2)(vi) and replace it concludes that these regulatory revision might qualify as substantially with a price-based approach. The amendments are authorized by TILA similar where it is a clarification, proposal also would require a creditor section 129C(b)(2)(A)(vi), which explanation, logical extension, or to consider and verify the consumer’s permits, but does not require, the application of a pre-existing proposition debt, income, and monthly DTI ratio or Bureau to adopt guidelines or in the standard. The Bureau also seeks residual income. Specifically, the regulations relating to debt-to-income comment on its proposal to allow Bureau proposes to remove the text of ratios or alternative measures of ability creditors to ‘‘mix and match’’ current § 1026.43(e)(2)(vi) and to

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provide instead that, to be a General QM proposing to remove the 43 percent DTI may apply during that five-year period loan under § 1026.43(e)(2), the APR may limit in current § 1026.43(e)(2)(vi) and as the interest rate for the full term of not exceed APOR for a comparable replace it with a price-based approach the loan. The guidance provided in transaction as of the date the interest because the Bureau is concerned that proposed comment 43(e)(2)(vi)–4 is rate is set by the amounts specified in retaining the existing General QM loan discussed further, below. § 1026.43(e)(2)(vi)(A) through (E).262 definition with the 43 percent DTI limit The Bureau proposes to adopt a price- Proposed § 1026.43(e)(2)(vi)(A) through after the expiration of Temporary GSE based approach to defining General QM (E) would provide specific rate spread QM loan definition expires would loans in § 1026.43(e)(2)(vi) pursuant to thresholds for purposes of significantly reduce the size of QM and § 1026.43(e)(2), including higher could significantly reduce access to its authority under TILA section thresholds for small loan amounts and responsible, affordable credit. The 129C(b)(3)(B)(i). The Bureau subordinate-lien transactions. Proposed Bureau is proposing a price-based preliminarily concludes that a price- § 1026.43(e)(2)(vi)(A) would provide approach to replace the specific DTI based approach to the General QM loan that for a first-lien covered transaction limit approach because it is concerned definition is necessary and proper to with a loan amount greater than or equal that imposing a DTI limit as a condition ensure that responsible, affordable to $109,898 (indexed for inflation), the for QM status under the General QM mortgage credit remains available to APR may not exceed APOR for a loan definition may be overly consumers in a manner that is comparable transaction as of the date burdensome and complex in practice consistent with the purposes of TILA the interest rate is set by two or more and may unduly restrict access to credit section 129C and is necessary and percentage points. Proposed because it provides an incomplete appropriate to effectuate the purposes of § 1026.43(e)(2)(vi)(B) and (C) would picture of the consumer’s financial TILA section 129C, which includes provide higher thresholds for smaller capacity. The Bureau preliminarily assuring that consumers are offered and first-lien covered transactions. Proposed concludes that a price-based General receive residential mortgage loans on § 1026.43(e)(2)(vi)(D) and (E) would QM loan definition is appropriate terms that reasonably reflect their ability provide higher thresholds for because a loan’s price, as measured by to repay the loan. As noted above, the subordinate-lien covered transactions. comparing a loan’s APR to APOR for a Bureau is concerned that, when the Loans priced at or above the thresholds comparable transaction, is a strong Temporary GSE QM loan definition in proposed § 1026.43(e)(2)(vi)(A) indicator of a consumer’s ability to expires, there would be a significant through (E) would not be eligible for repay and is a more holistic and flexible reduction in access to credit if the QM status under § 1026.43(e)(2). The measure of a consumer’s ability to repay Bureau retained the existing General proposal would also provide that the than DTI alone. QM loan definition with the 43 percent loan amounts specified in The Bureau also proposes to remove DTI limit. The Bureau preliminarily § 1026.43(e)(2)(vi)(A) through (E) be current comment 43(e)(2)(vi)–1, which concludes that a price-based General adjusted annually for inflation based on relates to the calculation of monthly QM loan definition is appropriate changes in the Consumer Price Index for payments on a covered transaction and All Urban Consumers (CPI–U). because a loan’s price, as measured by for simultaneous loans for purposes of comparing a loan’s APR to APOR for a Proposed § 1026.43(e)(2)(vi) would calculating the consumer’s DTI ratio comparable transaction, is a strong also provide a special rule for under current § 1026.43(e)(2)(vi). The indicator of a consumer’s ability to determining the APR for purposes of Bureau believes this comment would be determining a loan’s status as a General unnecessary under the proposal to move repay. Further, the Bureau preliminarily QM loan under § 1026.43(e)(2) for the text of current § 1026.43(e)(2)(vi) concludes that a price-based approach is certain ARMs and other loans for which and revise it to remove the references to a more holistic and flexible measure of the interest rate may or will change in appendix Q. The Bureau proposes to a consumer’s ability to repay than DTI the first five years of the loan. replace current comment 43(e)(2)(vi)–1 ratios alone, and therefore would better Specifically, proposed with a cross-reference to comments promote access to credit by providing § 1026.43(e)(2)(vi) would provide that, 43(b)(4)–1 through –3 for guidance on QM status to consumers with DTI ratios for purposes of § 1026.43(e)(2)(vi), the determining APOR for a comparable above 43 percent for whom it may be creditor must determine the APR for a transaction as of the date the interest appropriate to presume ability to repay. loan for which the interest rate may or rate is set. The Bureau also proposes As such, the Bureau preliminarily will change within the first five years new comment 43(e)(2)(vi)–2, which concludes that a price-based approach after the date on which the first regular provides that a creditor must determine to the General QM loan definition periodic payment will be due by the applicable rate spread threshold would both ensure that responsible, treating the maximum interest rate that based on the face amount of the note, affordable mortgage credit remains may apply during that five-year period which is the ‘‘loan amount’’ as defined available to consumers and assure that as the interest rate for the full term of in § 1026.43(b)(5). In addition, the consumers are offered and receive the loan. Bureau proposes comment 43(e)(2)(vi)– residential mortgage loans on terms that The Bureau is proposing these 3 in which it will publish the annually revisions to § 1026.43(e)(2)(vi) for the reasonably reflect their ability to repay adjusted loan amounts to reflect changes the loan. For these same reasons, the reasons set forth above in part V. As in the CPI–U. The Bureau also proposes explained above, the Bureau is Bureau also proposes to adopt a price- new comment 43(e)(2)(vi)–4, which based requirement in § 1026.43(e)(2)(vi) explains the proposed special rule that, 262 pursuant to its authority under TILA As explained above in the section-by-section for purposes of § 1026.43(e)(2)(vi), the discussion of § 1026.43(e)(2)(v)(A), the Bureau is section 105(a) to issue regulations that, creditor must determine the APR for a proposing to move to § 1026.43(e)(2)(v)(A) the among other things, contain such provisions in existing § 1026.43(e)(2)(vi)(B), which loan for which the interest rate may or additional requirements or other specify that the consumer’s monthly DTI ratio is will change within the first five years determined using the consumer’s monthly payment after the date on which the first regular provisions, or that provide for such on the covered transaction and any simultaneous adjustments for all or any class of loan that the creditor knows or has reason to know periodic payment will be due by will be made. treating the maximum interest rate that transactions, that in the Bureau’s

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judgment are necessary or proper to the loan was consummated. Here, the the overall performance of loans in the effectuate the purposes of TILA, which Bureau analyzed early delinquency rates Table 6 dataset was significantly better include the above purpose of section in considering the pricing thresholds at than those represented in Table 5. For 129C, among other things. The Bureau which a loan should be presumed to loans with DTI ratios of 36 to 43 preliminarily concludes that the price- comply with the ATR provisions. The percent—the category in Table 6 that based addition to the QM criteria is Bureau analyzed NMDB and HMDA includes the current DTI limit of 43 necessary and proper to achieve this data to assess early delinquency rates percent—early delinquency rates purpose, for the reasons described for first-lien purchase originations, reached 3.9 percent (at rate spreads of above. Finally, the Bureau preliminarily using both DTI and rate spread. The at least 2 percentage points). The concludes a price-based approach is data are summarized in Tables 1 highest early delinquency rate authorized by TILA section through 6, above. Tables 5 and 6 show associated with the proposed rate 129C(b)(2)(A)(vi), which permits, but the early delinquency rates for samples spread threshold (less than 2 percentage does not require, the Bureau to adopt of loans categorized by both their DTI points over APOR) is 3.2 percent and guidelines or regulations relating to DTI and their rate spread. corresponds to loans with the DTI ratios ratios or alternative measures of ability Table 5 shows early delinquency rates of 26 to 35 percent. At the same rate to pay regular expenses after payment of for 2002–2008 first-lien purchase spread threshold, the early delinquency total monthly debt. originations in the NMDB. The 2002– rate for the loans with the highest DTI 2008 time period corresponds to a ratios is 2.3 percent.265 The General QM Loan Pricing Although in Tables 5 and 6 Thresholds market environment that, in general, demonstrates looser, higher-risk credit delinquency rates rise with rate spread, Proposed § 1026.43(e)(2)(vi)(A) would conditions.263 The Bureau’s analyses there is no clear point at which establish the pricing threshold for most found direct correlations between rate delinquency rates accelerate. General QM loans. Specifically, spreads and early delinquency rates Comparisons between a high-risk credit proposed § 1026.43(e)(2)(vi)(A) would across all DTI ranges reviewed. Loans market (Table 5) and a low-risk credit provide that, for a first-lien covered with low rate spreads had relatively low market (Table 6) show substantial transaction with a loan amount greater early delinquency rates even at high DTI expansion of early delinquency rates than or equal to $109,898 (indexed for levels. The highest early delinquency during an economic downturn across all inflation), the APR may not exceed rates corresponded to loans with both rate spreads and DTI ratios. Data show APOR for a comparable transaction as of high rate spreads and high DTI ratios. that, for example, prime loans that the date the interest rate is set by two For loans with DTI ratios of 41 to 43 experience a 0.2 percent early or more percentage points. Loans that percent—the category in Table 5 that delinquency rate in a low-risk market are priced at or above the two- includes the current DTI limit of 43 might experience a 2 percent early percentage point threshold would not be percent—the early delinquency rates delinquency rate in a higher-risk eligible for QM status under reached 16 percent at rate spreads market, while subprime loans with a 4.2 § 1026.43(e)(2), except that, as discussed including and above 2.25 percentage percent early delinquency rate in a low- below, the proposal provides higher points over APOR. At rate spreads risk market might experience a 19 thresholds for loans with smaller loan inclusive of 1.75 through 1.99 percent early delinquency rate in a amounts and for subordinate-lien percentage points over APOR—the higher-risk market. transactions. As discussed above, for all As discussed above, other analyses category that is just below the proposed loans, the proposal preserves the current reviewed by the Bureau also show a two-percentage-point rate spread thresholds in § 1026.43(e)(1)(i) that strong positive correlation of threshold—the early delinquency rate separate safe harbor from rebuttable delinquency rates with interest rate presumption QMs, so that a loan that reached 22 percent for DTI ratios of 61 spreads.266 Collectively, this evidence otherwise meets the General QM loan to 70 percent. At DTI ratios of 41 to 43 suggests that higher rate spreads— definition is a safe harbor QM if its APR percent and rate spreads inclusive of including the specific measure of APR exceeds APOR for a comparable 1.75 through 1.99 percentage points over APOR—are strongly correlated transaction as of the date the interest over APOR, the early delinquency rate with future early delinquency rates. The rate was set by less than 1.5 percentage is 15 percent. Bureau expects that, for loans just below points for first-lien transactions, or 3.5 Table 6 shows average delinquency the respective thresholds, a pricing percentage points for subordinate-lien statistics for 2018 NMDB first-lien threshold of two percentage points over transactions. Under the proposal, all purchase originations that have been APOR would generally result in similar other QM loans would continue to be matched to 2018 HMDA data. In or somewhat higher early delinquency considered rebuttable presumption QMs contrast to Table 5, the time period in rates relative to the current DTI limit of under § 1026.43(e)(1)(ii). Table 6 corresponds to a market 43 percent. However, Bureau analysis In considering pricing thresholds for environment that, in general, shows the early delinquency rate for the General QM loan definition, the demonstrates tighter, lower-risk credit this set of loans is on par with loans that 264 Bureau has placed particular emphasis conditions. In the 2018 data in Table have received QM status under the on balancing considerations related to 6, early delinquency rates also increased Temporary GSE QM loan definition. ensuring consumers’ ability to repay as rate spreads increased across each Restricting the sample of 2018 NMDB– with maintaining access to responsible, range of DTI ratios analyzed, although affordable mortgage credit. The Bureau 265 The apparent anomalies in the progression of 263 tentatively concludes that, in general, a Characteristics of a high-risk credit market the early delinquency rates across DTI ratios at the include very high unemployment and falling home higher rate spread categories in Table 6 is likely two-percentage-point-over-APOR prices. because there are relatively few loans in the 2018 threshold would strike the appropriate 264 Characteristics of a low-risk credit market data with the indicated combinations of higher rate balance between these two objectives. include very low unemployment and rising home spreads and lower DTI ratios and some creditors As explained above, the Bureau uses prices. As noted above, this more recent sample of require that consumers demonstrate more early delinquency rates as a proxy for data provides insight into early delinquency rates compensating factors on higher DTI loans. under post-crisis lending standards for a dataset of 266 See discussion of data and analyses provided measuring whether a consumer had a loans that had not undergone an economic by CoreLogic and the Urban Institute, in part V, reasonable ability to repay at the time downturn. above.

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HMDA matched first-lien conventional the rule, allowing additional loans to lower than 2 percentage points over purchase originations to only those obtain QM status.269 Further, the APOR. For commenters suggesting a purchased and guaranteed by the GSEs, proposal would result in a substantial lower rate spread threshold, the Bureau loans with rate spreads at or above 2 expansion of access to credit as requests commenters provide data or percentage points had an early compared to the current rule without other analysis that would show that delinquency rate of 4.2 percent, higher the Temporary GSE QM loan definition, adopting a lower threshold would not than the maximum early delinquency under which only an estimated 73.6 have adverse effects on access to credit. rates observed for loans with rate percent of conventional purchase loans All commenters are encouraged to spreads below 2 percentage points in would be QMs. include data or other analysis to support either Table 2 (2.7 percent) or Table 6 The Bureau is concerned that rate their recommendations for a particular (3.2 percent).267 Consequently, the spread thresholds lower than two threshold, including the proposed two- Bureau does not believe that the price- percentage points over APOR could percentage-point-over-APOR threshold. based approach would result in result in a significant reduction in The Bureau also seeks comments on substantially higher delinquency rates access to credit when the Temporary whether creditors may be expected to than the standard included in the GSE QM definition expires. This is change lending practices in response to current rule. Although some especially true given the modest amount the addition of any rate spread commenters on the ANPR of non-QM lending identified in the threshold in the definition of General recommended rate spread thresholds as Bureau’s Assessment Report, and the QM (for example, by lowering interest high as 2.5 percentage points over recent sharp reduction in that lending in rates to fit within rate spread APOR, the Bureau is not proposing a recent months. The Bureau is also thresholds), and how that would affect higher General QM threshold for most concerned that a rate spread threshold the size of the QM market. In addition, loans because of concerns that such higher than two percentage points over in light of the concerns about the loans would have high predicted APOR would define a QM boundary sensitivity of a price-based QM delinquency rates, which appears that substantially covers the entire definition to macroeconomic cycles, the inconsistent with the goal of assuring mortgage market, except for loans with Bureau requests comment on whether that consumers of loans that receive QM statutorily prohibited features, the Bureau should consider adjusting status and the resulting presumption of including loans for which the early the pricing thresholds in emergency compliance with the ATR requirements delinquency rate suggests the consumer situations and, if so, how the Bureau do, in fact, have ability to repay. may not have had a reasonable ability to should do so. The Bureau has used 2018 HMDA repay at consummation. data to estimate that 95.8 percent of The Bureau preliminarily concludes Thresholds for Smaller Loans and conventional purchase loans currently that, for most first-lien covered Subordinate-Lien Transactions meet the criteria to be defined as QMs, transactions, a threshold of two Proposed § 1026.43(e)(2)(vi)(B) and including under the Temporary GSE percentage points over APOR is an (C) would establish higher pricing QM loan definition. The Bureau also appropriate criterion to include in the thresholds for smaller loans, and loans uses 2018 HMDA data to project that the definition of General QM in priced at or above the proposed proposed two-percentage-point-over- § 1026.43(e)(2)(vi). This proposed thresholds would not be eligible for QM APOR threshold would result in a 96.1 threshold would appropriately balance status under § 1026.43(e)(2). percent market share for QMs with an the certainty provided to the market Specifically, proposed adjustment for small loans, as discussed from ensuring that loans afforded QM § 1026.43(e)(2)(vi)(B) would provide below.268 Creditors may also respond to status may be presumed to comply with that, for first-lien covered transactions such a threshold by lowering pricing on the ATR provisions, with assurances with loan amounts greater than or equal some loans near the threshold, further that access to responsible, affordable to $65,939 but less than $109,898,270 the increasing the QM market share. mortgage credit remains available to threshold would be 3.5 percentage Therefore, using the size of the QM consumers. points over APOR. Proposed market as an indicator of access to The Bureau requests comment on § 1026.43(e)(2)(vi)(C) would provide credit, the Bureau expects that a pricing whether the final rule should establish that, for first-lien covered transactions threshold of two percentage points over in § 1026.43(e)(2)(vi)(A) a different rate with loan amounts less than $65,939, APOR, in combination with the spread threshold and, if so, what the the threshold would be 6.5 percentage proposed adjustments for small loans, threshold should be. The Bureau points over APOR. would result in an expansion of access requests comment on whether the Proposed § 1026.43(e)(2)(vi)(D) and to credit as compared to the current rule General QM rate spread threshold (E) would establish higher thresholds including the Temporary GSE QM loan should be higher than 2 percentage for subordinate-lien transactions, with definition, particularly as creditors are points over APOR. For commenters different thresholds depending on the likely to adjust pricing in response to suggesting a higher rate spread size of the transaction. Subordinate-lien threshold, the Bureau requests transactions priced at or above the 267 This comparison uses 2018 data on GSE commenters provide data or other proposed thresholds would not be originations because such loans were originated analysis that would support providing while the Temporary GSE QM loan definition was QM status to such loans, which the in effect and the GSEs were in conservatorship. GSE 270 The Bureau is proposing $65,939, rather than loans from the 2002 to 2008 period were originated Bureau expects would have higher risk a threshold such as $60,000 or $65,000, and under a different regulatory regime and with profiles. The Bureau also requests $109,898, rather than a threshold such as $100,000 different underwriting practices (e.g., GSE loans comment on whether the General QM or $110,000, because the proposed thresholds align more commonly had DTI ratios over 50 percent with certain thresholds for the limits on points and during the 2002 to 2008 period), and thus may not rate spread threshold should be set fees, as updated for inflation, in § 1026.43(e)(3)(i) be directly comparable to loans made under the and the associated commentary. The Bureau will Temporary GSE QM loan definition. 269 The Bureau acknowledges, however, that some update these loan amounts if the corresponding 268 The Bureau estimates that alternative QM loans that do not meet the current General QM loan dollar amounts for § 1026.43(e)(3)(i) and the pricing thresholds of 1.5, 1.75, 2.25, and 2.5 definition, but that would be General QMs under associated commentary are updated before this final percentage points over APOR would result in QM the proposed price-based approach, would have rule becomes effective, in order to ensure that the market shares of 94.3, 95.3, 96.6, and 96.8 percent, been made under other QM definitions (e.g., FHA, loan amounts for this provision and § 1026.43(e)(3) respectively. small-creditor QM). remain synchronized.

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eligible for QM status under smaller loans with APRs within higher COVID–19 pandemic raises further § 1026.43(e)(2). Specifically, proposed thresholds may have similar credit concerns about the capacity of the non- § 1026.43(e)(2)(vi)(D) would provide characteristics as consumers who take QM market to provide consumers with that, for subordinate-lien covered out larger loans. The Bureau’s analysis access to credit through such loans. transactions with loan amounts greater also indicates that smaller loans with The Bureau also notes that, in the than or equal to $65,939, the threshold APRs within higher thresholds may Dodd-Frank Act, Congress provided for would be 3.5 percentage points over have comparable levels of early additional pricing flexibility for APOR. Proposed § 1026.43(e)(2)(vi)(E) delinquencies as larger loans within creditors making smaller loans, allowing would provide that, for subordinate-lien lower thresholds. However, as smaller loans to include higher points covered transactions with loan amounts explained further below, the Bureau’s and fees while still meeting the QM less than $65,939, the threshold would analysis of delinquency levels for definition. TILA section be 6.5 percentage points over APOR. smaller loans, compared to larger loans, 129C(b)(2)(A)(vi) defines a QM as a loan The proposal would also provide that does not appear to indicate a threshold for which, among other things, the total the loan amounts specified in at which delinquency levels points and fees payable in connection § 1026.43(e)(2)(vi)(A) through (E) be significantly accelerate. with the loan do not exceed 3 percent adjusted annually for inflation based on The Bureau is concerned that of the total loan amount. However, TILA changes in CPI–U. Specifically, the section 129C(b)(2)(D) requires the Bureau would adjust the loan amounts adopting the same threshold of two Bureau to prescribe rules adjusting the in § 1026.43(e)(2)(vi) annually on percentage points above APOR for all points-and-fees limits for smaller loans. January 1 by the annual percentage loans could disproportionately prevent In the January 2013 Final Rule, the change in the CPI–U that was reported smaller loans from being originated as Bureau implemented this requirement on the preceding June 1. The Bureau General QM loans. In particular, the in § 1026.43(e)(3), adopting higher would publish adjustments in new Bureau’s analysis indicates that without points-and-fees thresholds for different comment 43(e)(2)(vi)-3 after the June higher thresholds for smaller loans, tiers of loan amounts less than or equal figures become available each year. loans for manufactured housing and The Bureau is proposing higher loans to minority consumers could to $100,000, adjusted for inflation. The thresholds for smaller loans because it disproportionately be excluded from Bureau’s preliminary conclusion that is concerned that loans with smaller being originated as General QM loans. creditors originating smaller loans loan amounts are typically priced higher The Bureau’s analysis of 2018 HMDA typically impose higher points and fees than loans with larger loan amounts, data found that 57.9 percent of or higher interest rates to recover their even though a consumer with a smaller manufactured housing loans are priced costs, regardless of the consumer’s loan may have similar credit two percentage points or more over creditworthiness, and that higher characteristics and ability to repay. APOR. The Bureau’s analysis also found thresholds for smaller loans in Many of the creditors’ costs for a that 5.1 percent of site-built loans to § 1026.43(e)(2)(vi) may, therefore, be transaction may be the same or similar, minority consumers are priced two appropriate, is consistent with the regardless of the loan amount. For percentage points or more over APOR, statutory directive to adopt higher creditors to recover their costs for but 3.5 percent of site-built loans to points-and-fees thresholds for smaller smaller loans, they may have to charge non-Hispanic white consumers are loans. higher interest rates or higher points priced two percentage points or more To develop the proposed thresholds and fees as a percentage of the loan over APOR. While some loans may be for smaller loans in amounts than they would for originated under other QM definitions § 1026.43(e)(2)(vi)(B) and (C), the comparable larger loans. As a result, or as non-QM loans, those loans may be Bureau analyzed evidence related to smaller loans may have higher APRs meaningfully more expensive, and some credit characteristics and loan than larger loans to consumers with loans may not be originated at all. As performance for first-lien purchase similar credit characteristics and who discussed in part V, the non-QM market transactions at various rate spreads and may have a similar ability to repay. As has been slow to develop, and the loan amounts (adjusted for inflation) discussed below, the Bureau’s analysis negative impact on the non-QM market using HMDA and NMDB data, as shown indicates that consumers who take out from the disruptions caused by the in Table 9.271

TABLE 9—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF FIRST-LIEN TRANSACTIONS AT VARIOUS RATE SPREADS

Percent observed Percent 60+ days observed Rate spread range Mean CLTV, Mean DTI, Mean credit delinquent 60+ days Loan size group (percentage points over 2018 HMDA 2018 HMDA score, within first delinquent APOR) 2018 HMDA 2 years, within first 2002–2008 2 years, NMDB 2018 NMDB

Under $65,939 ...... 1.5–2.0 ...... 81.9 32.3 717 6.1% 2.8% Under $65,939 ...... 1.5–2.5 ...... 82.2 32.3 714 6.1% 2.3% Under $65,939 ...... 1.5–3.0 ...... 82.1 32.2 714 6.2% 2.3% Under $65,939 ...... 1.5–3.5 ...... 81.9 32.1 715 6.2% 2.5% Under $65,939 ...... 1.5–4.0 ...... 81.7 32.3 714 6.3% 2.5%

271 See Bureau of Labor and Statistics, Historical (Using the CPI–U price index, nominal loan inflation-adjusted thresholds for smaller loans that Consumer Price Index for All Urban Consumers amounts are inflated to June 2019 dollars from the would have been in effect on the origination date.) (CPI–U), https://www.bls.gov/cpi/tables/ price level in June of the year prior to origination. supplemental-files/historical-cpi-u-202004.pdf. This effectively categorizes loans according to the

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TABLE 9—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF FIRST-LIEN TRANSACTIONS AT VARIOUS RATE SPREADS—Continued

Percent observed Percent 60+ days observed Rate spread range Mean CLTV, Mean DTI, Mean credit delinquent 60+ days Loan size group (percentage points over 2018 HMDA 2018 HMDA score, within first delinquent APOR) 2018 HMDA 2 years, within first 2002–2008 2 years, NMDB 2018 NMDB

Under $65,939 ...... 1.5–4.5 ...... 81.7 32.5 710 6.4% 2.6% Under $65,939 ...... 1.5–5.0 ...... 81.7 32.6 706 6.4% 2.5% Under $65,939 ...... 1.5–5.5 ...... 81.6 32.7 699 6.5% 2.4% Under $65,939 ...... 1.5–6.0 ...... 81.7 32.9 694 6.5% 2.5% Under $65,939 ...... 1.5–6.5 ...... 81.9 33.1 685 6.5% 3.4% Under $65,939 ...... 1.5 and above ...... 82.0 33.3 676 6.6% 4.1% $65,939 to $109,897 ...... 1.5–2.0 ...... 89.9 35.5 704 11.1% 3.4% $65,939 to $109,897 ...... 1.5–2.5 ...... 90.1 35.4 702 12.2% 4.2% $65,939 to $109,897 ...... 1.5–3.0 ...... 90.0 35.5 702 12.9% 4.2% $65,939 to $109,897 ...... 1.5–3.5 ...... 89.7 35.5 703 13.0% 4.3% $65,939 to $109,897 ...... 1.5–4.0 ...... 89.4 35.6 703 13.1% 4.0% $65,939 to $109,897 ...... 1.5–4.5 ...... 89.3 35.7 701 13.2% 4.2% $65,939 to $109,897 ...... 1.5–5.0 ...... 89.1 35.8 699 13.3% 4.1% $65,939 to $109,897 ...... 1.5–5.5 ...... 89.1 35.9 696 13.4% 4.0% $65,939 to $109,897 ...... 1.5–6.0 ...... 89.2 36.0 692 13.4% 4.2% $65,939 to $109,897 ...... 1.5–6.5 ...... 89.3 36.1 684 13.4% 4.5% $65,939 to $109,897 ...... 1.5 and above ...... 89.3 36.1 684 13.7% 4.5% $109,898 and above ...... 1.5–2.0 (for comparison) .... 92.7 39.4 698 14.9% 2.5%

The Bureau’s analysis indicates that With respect to early delinquencies, loans are somewhat higher for smaller consumers with smaller loans with the evidence summarized in Table 9 loans with higher APRs than larger APRs within higher potential generally provides support for higher loans with lower APRs. More thresholds, such as 6.5 or 3.5 percentage thresholds for smaller loans. Loans less specifically, NMDB data from 2018 on points above APOR, have similar credit than $65,939 had lower delinquency first-lien conventional purchase loans characteristics as consumers with larger rates than loans between $65,939 and show that loans below $65,939 that loans between 1.5 and 2 percentage $109,897 across all rate spread ranges were priced between 1.5 and 6.5 points above APOR.272 More and had delinquency rates lower than or percentage points above APOR had an specifically, the Bureau analyzed 2018 comparable to larger loans (equal to or early delinquency rate of 3.4 percent. HMDA data on first-lien conventional greater than $109,898) priced between Loans equal to or greater than $65,939 purchase loans and found that loans 1.5 and 2 percentage points above but less than $109,898 that were priced below $65,939 that are priced between APOR. Loans between $65,939 and between 1.5 and 3.5 percentage points 1.5 and 6.5 percentage points above $109,897 had lower delinquency rates above APOR had an early delinquency APOR have a mean DTI ratio of 33.1 than larger loans between 2002 and rate of 4.3 percent. Loans equal to or percent, a mean combined LTV ratio of 2008, but higher delinquency rates for greater than $109,898 that were priced 81.9 percent, and a mean credit score of 2018 loans. between 1.5 and 2 percentage points 685. Loans equal to or greater than More specifically, the Bureau above APOR had an early delinquency $65,939 but less than $109,898 that are analyzed NMDB data from 2002 through rate of 2.5 percent. priced between 1.5 and 3.5 percentage 2008 on first-lien conventional purchase Although the current data do not points above APOR have a mean DTI loans and found that loans below appear to indicate a particular threshold ratio of 35.5 percent, a mean combined $65,939 that were priced between 1.5 at which the credit characteristics or LTV of 89.7 percent, and a mean credit and 6.5 percentage points above APOR loan performance for smaller loans with score of 703. Loans equal to or greater had an early delinquency rate of 6.5 higher APRs decline significantly, the than $109,898 that are priced between percent. Loans equal to or greater than Bureau preliminarily concludes that the 1.5 and 2 percentage points above APOR $65,939 but less than $109,898 that proposed thresholds in have a mean DTI ratio of 39.4 percent, were priced between 1.5 and 3.5 § 1026.43(e)(2)(vi)(B) and (C) for a mean combined LTV of 92.7 percent, percentage points above APOR had an smaller, first-lien covered transactions and a mean credit score of 698. These early delinquency rate of 13 percent. would strike the right balance in all suggest that the credit characteristics, Loans equal to or greater than $109,898 delineating which loans should be and potentially the ability to repay, of that were priced between 1.5 and 2 eligible for a rebuttable presumption of consumers taking out smaller loans with percentage points above APOR had an compliance with the ATR requirements. higher APRs, may be at least comparable early delinquency rate of 14.9 percent. The Bureau believes the proposed to those of consumers taking out larger These rates suggest that the historical thresholds may help ensure that loans with lower APRs. loan performance of smaller loans with responsible, affordable credit remains higher APRs may be comparable, if not available to consumers taking out 272 Portfolio loans made by small creditors, as better, than larger loans with lower smaller loans, in particular loans for defined in § 1026.35(b)(2)(iii)(B) and (C), are APRs. excluded, as such loans are likely Small Creditor manufactured housing and loans to QMs pursuant to § 1026.43(e)(5) regardless of However, the Bureau’s analysis found minority consumers, while also helping pricing. that early delinquency rates for 2018 to ensure that the risks are limited so

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that it would be appropriate for those factors discussed above for smaller loan a rebuttable presumption of compliance. loans to receive a rebuttable amounts may further increase the price As discussed above in part V, the presumption of compliance with the of subordinate-lien transaction, Bureau is not proposing to alter the ATR requirements. regardless of the consumer’s ability to threshold for subordinate-lien The Bureau is proposing higher repay. The Bureau is concerned that, to transactions in § 1026.43(b)(4). To avoid thresholds in § 1026.43(e)(2)(vi)(D) and the extent the higher pricing for the odd result that a subordinate-lien (E) for subordinate-lien transactions subordinate-lien transaction is not transaction would otherwise be eligible because it is concerned that related to consumers’ ability to repay, to receive a safe harbor under subordinate-lien transactions may be subordinate-lien transactions may be § 1026.43(b)(4) and (e)(1) but would not priced higher than comparable first-lien inappropriately excluded from QM be eligible for QM status under transactions for reasons other than status under § 1026.43(e)(2) if the § 1026.43(e)(2)(vi), the Bureau consumers’ ability to repay. In general, pricing thresholds for subordinate-lien considered which threshold or the creditor of a subordinate lien will transactions are not increased. thresholds at or above 3.5 percentage recover its principal, in the event of In the January 2013 Final Rule, the points above APOR may be appropriate default and foreclosure, only to the Bureau adopted higher thresholds for to propose for subordinate-lien extent funds remain after the first-lien determining when subordinate-lien transactions in § 1026.43(e)(2)(vi). creditor recovers its principal. Thus, to QMs received a rebuttable presumption To develop the proposed thresholds compensate for this risk, creditors or a conclusive presumption of for subordinate-lien transactions in typically price subordinate-lien compliance with the ATR requirements. § 1026.43(e)(2)(vi)(D) and (E), the transactions higher than first-lien For subordinate-lien transactions, the Bureau considered evidence related to transactions, even though the consumer definition of ‘‘higher-priced covered credit characteristics and loan in the subordinate-lien transaction may transaction’’ in § 1026.43(b)(4) is used in performance for subordinate-lien have similar credit characteristics and § 1026.43(e)(1) to set a threshold of 3.5 transactions at various rate spreads and ability to repay. In addition, percentage points above APOR to loan amounts (adjusted for inflation) subordinate-lien transactions are often determine which subordinate-lien QMs using HMDA and Y–14M data, as shown for smaller loan amounts, so the pricing receive a safe harbor and which receive in Table 10.

TABLE 10—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF SUBORDINATE-LIEN TRANSACTIONS AT VARIOUS RATE SPREADS

Percent observed 90+ days Mean credit delinquent Loan size group Rate spread range Mean CLTV, Mean DTI, score, within first (percentage points over APOR) 2018 HMDA 2018 HMDA 2018 HMDA 2 years, 2013–2016 Y–14M data (subset)

Under $65,939 ...... 2.0–2.5 ...... 76.9 36.1 728 2.1% Under $65,939 ...... 2.0–3.0 ...... 78.4 36.5 724 1.6% Under $65,939 ...... 2.0–3.5 ...... 79.7 36.8 721 1.4% Under $65,939 ...... 2.0–4.0 ...... 80.1 36.9 720 1.4% Under $65,939 ...... 2.0–4.5 ...... 80.2 36.9 719 1.3% Under $65,939 ...... 2.0–5.0 ...... 80.3 37.0 718 1.3% Under $65,939 ...... 2.0–5.5 ...... 80.3 37.1 718 1.3% Under $65,939 ...... 2.0–6.0 ...... 80.3 37.1 717 1.3% Under $65,939 ...... 2.0–6.5 ...... 80.4 37.2 717 1.3% Under $65,939 ...... 2.0 and above ...... 80.7 37.3 715 1.4% $65,939 and above ...... 2.0–2.5 ...... 79.5 37.2 738 1.9% $65,939 and above ...... 2.0–3.0 ...... 80.5 37.3 735 1.7% $65,939 and above ...... 2.0–3.5 ...... 81.0 37.4 732 1.6% $65,939 and above ...... 2.0–4.0 ...... 81.3 37.5 732 1.7% $65,939 and above ...... 2.0–4.5 ...... 81.3 37.6 731 1.7% $65,939 and above ...... 2.0–5.0 ...... 81.5 37.7 731 1.8% $65,939 and above ...... 2.0–5.5 ...... 81.6 37.7 730 1.8% $65,939 and above ...... 2.0–6.0 ...... 81.6 37.8 729 1.8% $65,939 and above ...... 2.0–6.5 ...... 81.7 37.9 729 1.8% $65,939 and above ...... 2.0 and above ...... 81.8 37.9 728 1.9%

In general, the Bureau’s analysis With respect to larger subordinate- mean combined LTV was 81 percent, found strong credit characteristics and lien transactions, the Bureau’s analysis and the mean credit score was 732. The loan performance for subordinate-lien of 2018 HMDA data on subordinate-lien Bureau also analyzed Y–14M loan data loans at various thresholds above two conventional loans found that, for for 2013 to 2016 and estimated that percentage points above APOR. The consumers with subordinate-lien subordinate-lien transactions greater current data do not appear to indicate a transactions greater than or equal to than or equal to $65,939 that were particular threshold at which the credit $65,939 that were priced 2 to 3.5 priced 2 to 3.5 percentage points above characteristics or loan performance percentage points above APOR, the APOR had an early delinquency rate of decline significantly. mean DTI ratio was 37.4 percent, the

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approximately 1.6 percent.273 These points above APOR for subordinate-lien loan amounts less than $65,939 would factors appear to provide a strong transactions less than $65,939 to be strike a better balance between ability to indication of ability to repay, so the eligible for QM status under repay and access to credit. For Bureau preliminarily concludes that it § 1026.43(e)(2). The Bureau notes that commenters suggesting a different rate may be appropriate to set the threshold under this proposal, subordinate-lien spread threshold, the Bureau requests at 3.5 percentage points above APOR for transactions less than $65,939 priced commenters provide data or other subordinate-lien transactions to be greater than or equal to 3.5 but less than analysis that would support providing eligible for QM status under 6.5 percentage points above APOR General QM status to such loans taking § 1026.43(e)(2). The Bureau recognizes would be eligible only for a rebuttable into account concerns regarding the that, because the proposed price-based presumption of compliance under consumer’s ability to repay and adverse approach would leave the threshold in § 1026.43(e)(1)(ii) and that consumers, effects on access to credit. § 1026.43(b)(4) for higher-priced QMs at therefore, would have the opportunity The Bureau also requests comment, 3.5 percentage points above APOR for to rebut the presumption under including data and other analysis, on subordinate-lien transactions (and that § 1026.43(e)(1)(ii)(B). whether the rule should include a DTI such transactions that are not higher The Bureau requests comment, limit for smaller loans and subordinate- priced would, therefore, receive a safe including data or other analysis, on lien loans; for example, a DTI limit harbor under § 1026.43(e)(1)(i)), this whether the final rule in between 45 and 48 percent, instead of approach, if adopted, would result in § 1026.43(e)(2)(vi)(B) through (C) should a pricing threshold or together with a subordinate-lien transactions for include different rate spread thresholds pricing threshold, and, if so, what those amounts over $65,939 either being a safe at which smaller loans would be limits should be. This includes harbor QM or not being eligible for QM considered General QM loans, and, if so, comment on whether the approach to status under § 1026.43(e)(2). No such what those thresholds should be. smaller loans and subordinate-lien loans loans would be eligible to be a Specifically, the Bureau requests should differ from the approach to other rebuttable presumption QM. comment on whether the General QM loans if the Bureau adopts one of the Nevertheless, the Bureau believes that rate spread threshold for first-lien loans alternatives outlined in part V.E above. the proposed threshold may should be higher or lower than the rate Determining the APR for Certain Loans appropriately balance the relatively spread ranges set forth in Table 9 for for which the Interest Rate May or Will strong credit characteristics and loan such loans with loan amounts less than Change performance of these transactions $109,987 and greater than or equal to historically, which is indicative of $65,939 and for such loans with loan The Bureau is also proposing to revise ability to repay, against the concern that amounts less than $65,939. For § 1026.43(e)(2)(vi) to include a special the supporting data are limited to recent example, the Bureau solicits comments rule for determining the APR for certain years with strong economic performance on whether a rate spread threshold of types of loans for purposes of whether and conservative underwriting. less than 6.5 percentage points above a loan meets the General QM loan For smaller subordinate-lien APOR for loan amounts less than definition under § 1026.43(e)(2). This transactions, the Bureau’s analysis of $65,939 would strike a better balance special rule would apply to loans for 2018 HMDA data on subordinate-lien between ability to repay and access to which the interest rate may or will conventional loans found that for credit, in particular with respect to change within the first five years after consumers with subordinate-lien loans for manufactured housing and the date on which the first regular transactions less than $65,939 with that loans to minority borrowers. For periodic payment will be due. For such were priced between 2 and 6.5 commenters suggesting a different rate loans, for purposes of determining percentage points above APOR, the spread threshold, the Bureau requests whether the loan is a General QM loan mean DTI ratio was 37.2 percent, the commenters provide data or other under § 1026.43(e)(2)(vi), the creditor mean combined LTV was 80.4 percent, analysis that would support providing would be required to determine the APR and the mean credit score was 717. The General QM status to such loans taking by treating the maximum interest rate Bureau also analyzed Y–14M loan data into account concerns regarding the that may apply during that five-year for 2013 to 2016 and estimated that consumer’s ability to repay and adverse period as the interest rate for the full subordinate-lien transactions less than effects on access to credit. term of the loan.274 The special rule in $65,939 that were priced between 2 and The Bureau also requests comment, the proposed revisions to 6.5 percentage points above APOR, the including data or other analysis, on § 1026.43(e)(2)(vi) would not modify early delinquency rate was whether the final rule in other provisions in Regulation Z for approximately 1.3 percent. Based on § 1026.43(e)(2)(vi)(D) through (E) should determining the APR for other purposes, these relatively strong credit include different rate spread thresholds such as the disclosures addressed in or characteristics and low delinquency at which subordinate-lien loans would subject to the commentary to rates, the Bureau preliminarily be considered General QM loans, and, if § 1026.17(c)(1). concludes that it may be appropriate to so, what those thresholds should be. The Bureau anticipates that the set the threshold at 6.5 percentage Specifically, the Bureau requests proposed price-based approach to comment on whether the General QM defining General QM loans would in 273 The loan data were a subset of the supervisory rate spread threshold for subordinate- general be effective in identifying which loan-level data collected as part of the Board’s lien loans should be higher or lower loans consumers have the ability to Comprehensive Capital Analysis and Review, than the rate spread ranges set forth in repay and should therefore be eligible known as Y–14M data. The early delinquency rate Table 10 for such loans with loan measured the percentage of loans that were 90 or for QM status under § 1026.43(e)(2). more days late in the first two years. The Bureau amounts greater than or equal to used loans with payments that were 90 or more $65,939 and for such loans with loan 274 As discussed above in the section-by-section days late to measure delinquency, rather than the amounts less than $65,939. For analysis of proposed § 1026.43(b)(4), an identical 60 or more days used with the data discussed above example, the Bureau solicits comments special rule for determining the APR for certain for first-lien transactions, because the Y–14M data loans for which the interest rate may or will change do not include a measure for payments 60 or more on whether a rate spread threshold of also would apply under that paragraph for purposes days late. Data from a small number of creditors less than 6.5 percentage points above of determining whether a QM under § 1026.43(e)(2) were not included due to incompatible formatting. APOR for subordinate-lien loans with is a higher-priced covered transaction.

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However, the Bureau is concerned that, adjustments. For these ARMs, charged to the consumer may rise. To absent the special rule, the proposed Regulation Z requires the creditor to compensate for the added interest-rate price-based approach may less disclose a composite APR based on the risk assumed by the consumer (as effectively capture specific initial rate for as long as it is charged opposed to the investor), ARMs are unaffordability risks of certain loans for and, for the remainder of the term, on generally priced lower—in absolute which the interest rate may or will the fully indexed rate.277 The fully terms—than a 30-year fixed-rate change relatively soon after indexed rate at consummation is the mortgage with comparable credit risk.280 consummation. Therefore, for loans for sum of the value of the index at the time Yet with rising interest rates, the risks which the interest rate may or will of consummation plus the margin, based that ARMs could become unaffordable, change within the first five years after on the contract. The Dodd-Frank Act and therefore lead to delinquency or the date on which the first regular requires a different APR calculation for default, are more pronounced. As noted periodic payment will be due, a ARMs for the purpose of determining above, the requirements for determining modified approach to determining the whether ARMs are subject to certain the APR for ARMs in Regulation Z do APR for purposes of the rate-spread HOEPA requirements.278 As not reflect this risk because they do not thresholds under proposed implemented in § 1026.32(a)(3)(ii), the take into account potential increases in § 1026.43(e)(2) may be warranted. creditor is required to determine the the interest rate over the term of the Structure and pricing particular to APR for HOEPA coverage for loan based on changes to the underlying ARMs. The special rule in proposed transactions in which the interest rate index. This APR may therefore § 1026.43(e)(2)(vi) would apply may vary during the term of the loan in understate the risk that the loan may principally to ARMs with initial fixed- accordance with an index, such as with become unaffordable to the consumer if rate periods of five years or less an ARM, by using the fully indexed rate interest rates increase. (referred to herein as ‘‘short-reset or the introductory rate, whichever is 279 Unaffordability risk more acute for ARMs’’).275 These loans may be greater. short-reset ARMs. While all ARMs run The requirements in Regulation Z for affordable for the initial fixed-rate the risk of increases in interest rates and determining the APR for disclosure period but may become unaffordable payments over time, longer-reset ARMs purposes and for HOEPA coverage relatively soon after consummation if (i.e., ARMs with initial fixed-rate purposes do not account for any the payments increase appreciably after periods of longer than five years) potential increase or decrease in interest reset, causing payment shock. The APR present a less acute risk of for short-reset ARMs may be less rates based on changes to the underlying index. If interest rates rise after unaffordability than short-reset ARMs. predictive of ability to repay than for Longer-reset ARMs permit consumers to fixed-rate mortgages because of how consummation, and therefore the value of the index rises to a higher level, the take advantage of lower interest rates for ARMs are structured and priced and more than five years and thus, akin to how the APR for ARMs is determined loan can reset to a higher interest rate than the fully indexed rate at the time fixed-rate mortgages, provide consumers under various provisions in Regulation significant time to pay off or refinance, Z. Several different provisions in of consummation. The result would be a higher payment than the one implied or to otherwise adjust to anticipated Regulation Z address the calculation of changes in payment during that the APR for ARMs. For disclosure by the rates used in determining the APR, and a higher effective rate spread relatively long period while the interest purposes, if the initial interest rate is rate is fixed and before payments may determined by the index or formula to (and increased likelihood of delinquency) than the spread that increase. make later interest rate adjustments, would be taken into account for Short-reset ARMs can also contribute Regulation Z generally requires the determining General QM status at to speculative lending because they creditor to base the APR disclosure on consummation under the price-based permit creditors to originate loans that the initial interest rate at consummation approach in the absence of a special could be affordable in the short term, and to not assume that the rate will rule. with the expectation that property increase during the remainder of the ARMs may present more risk for values will increase and thereby permit loan.276 In some transactions, including consumers than fixed-rate mortgages, consumers to refinance before payments many ARMs, the creditor may set an depending on the direction and may become unaffordable. Further, initial interest rate that is lower (or less magnitude of changes in interest rates. creditors can minimize their credit risk commonly, higher) than the rate would In the case of a 30-year fixed-rate loan, on such ARMs by, for example, be if it were determined by the index or creditors or mortgage investors assume requiring lower LTV ratios, as was formula used to make later interest rate both the credit risk and the interest-rate common in the run-up to the 2008 risk (i.e., the risk that interest rates rise financial crisis.281 Additionally, 275 In addition to short-reset ARMs, the proposed special rule would apply to step-rate mortgages that above the fixed rate the consumer is creditors may be more willing to market have an initial fixed-rate period of five years or less. obligated to pay), and the price of the these ARMs in areas of strong housing- The Bureau recognizes that the interest rates in loan, which is fully captured by the price appreciation, irrespective of a step-rate mortgages are known at consummation. APR, reflects both risks. In the case of consumer’s ability to absorb the However, unlike fixed-rate mortgages and akin to ARMs, the interest rate of step-rate mortgages an ARM, the creditor or investor is potentially higher payments after reset, changes, thereby raising the concern that interest- assuming the credit risk of the loan, but because they may expect that consumers rate increases relatively soon after consummation the consumer assumes most of the will have the equity to refinance if may present affordability risks due to higher loan interest-rate risk, as the interest rate will necessary. payments. Moreover, applying the proposed APR determination requirement to such loans is adjust along with the market. The extent consistent with the treatment of step-rate mortgages to which the consumer assumes the 280 The lower absolute pricing of ARMs with pursuant to the requirement in the current General interest-rate risk is established by caps comparable credit risk is reflected in the lower QM loan definition to underwrite loans using the in the note on how high the interest rate ARM APOR, which is typically 50 to 150 basis maximum interest rate during the first five years points lower than the fixed-rate APOR. after the date on which the first regular periodic 281 Bureau analysis of NMDB data shows crisis- payment will be due. See comment 43(e)(2)(iv)– 277 See comment 17(c)(1)–10. era short-reset ARMs had lower LTVs at 3.iii. 278 See TILA section 103(bb)(1)(B)(ii). consummation relative to comparably priced fixed- 276 See comment 17(c)(1)–8. 279 See comment 32(a)(3)–3. rate loans.

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In the Dodd-Frank Act, Congress How the price-based approach would reset ARMs pose a higher risk vis-a-vis addressed affordability concerns address affordability concerns. Bureau other ARMs of becoming unaffordable specific to short-reset ARMs and their analysis of historical ARM pricing and in the first five years, before consumers eligibility for QM status by providing in performance indicates that the General have sufficient time to refinance or TILA section 129C(b)(2)(A)(v) that, to QM product restrictions combined with adjust to the larger payments—a receive QM status, ARMs must be the proposed price-based approach concern Congress also identified in the underwritten using the maximum would have effectively excluded Dodd-Frank Act. interest rate that may apply during the many—but not all—of the riskiest short- During the peak of the mid-2000s first five years.282 The ATR/QM Rule reset ARMs from obtaining General QM housing boom, ARMs accounted for as implemented this requirement in status. As a result, the Bureau believes much as 52 percent of all new Regulation Z at § 1026.43(e)(2)(iv). For an additional mechanism may be originations. In contrast, the current many short-reset ARMs, this merited to exclude from the General QM market share of ARMs is relatively requirement resulted in a higher DTI loan definition any short-reset ARMs for that would have to be compared to the which the pricing and structure indicate small. Post-crisis, the ARM share had Rule’s 43 percent DTI limit to determine a risk of delinquency that is inconsistent declined to 12 percent by December whether the loans were eligible to with the presumption of compliance 2013 and to 2 percent by November receive General QM status. Particularly with ATR that comes with QM status. 2019, only slightly above the historical 284 in a higher-rate environment in which Bureau analysis of NMDB data shows low of 1 percent in 2009. A number short-reset ARMs could become more that short-reset ARMs originated from of factors contributed to the overall attractive, the five-year maximum 2002 through 2008 had, on average, decline in ARM volume, particularly the interest-rate requirement combined with substantially higher early delinquency low-interest-rate environment since the the Rule’s 43 percent DTI limit would rates (14.9 percent) than other ARMs end of the financial crisis. Typically, have likely prevented some of the (10.1 percent) or fixed-rate mortgages ARMs are more popular when riskiest short-reset ARMs (i.e., those that (5.4 percent). Many of these short-reset conventional interest rates are high, adjust sharply upward in the first five ARMs were also substantially higher- since the rate (and monthly payment) years and cause payment shock) from priced relative to APOR and more likely during the initial fixed period is obtaining General QM status. As to have product features that TILA and typically lower than the rate of a discussed above, the proposed price- the Rule now prohibits for QMs, such as comparable conventional fixed-rate based approach would remove the DTI interest-only payments or negative mortgage. limit from the General QM loan amortization. When considering only Consistent with TILA section definition in § 1026.43(e)(2)(vi). As a loans without such restricted features 129C(b)(2)(A), the January 2013 Final result, the Bureau is concerned that, and with rate spreads within 2 Rule prohibited ARMs with higher-risk without the special rule, a price-based percentage points of APOR, short-reset features such as interest-only payments approach may not adequately address ARMs still have the highest average or negative amortization from receiving the risk that consumers taking out short- early delinquency rate (5.5 percent), but General QM status. According to the reset ARMs may not have the ability to the difference relative to other ARMs Assessment Report, short-reset ARMs repay those loans but that such loans (4.3 percent) and fixed-rate mortgages comprised 17 percent of ARMs in 2012, would nonetheless be eligible for (4.2 percent) is smaller. Many ARMs in prior to the January 2013 Final Rule, General QM status under the data during this period do not report and fell to 12.3 percent in 2015, after the 283 the time between consummation and § 1026.43(e)(2). effective date of the Rule.285 The the first interest-rate reset, and so are Assessment Report also found that 282 excluded from this analysis. This approach for ARMs is different from the short-reset ARMs originated after the approach in § 1026.43(c)(5) for underwriting ARMs While the data indicates that short- under the ATR requirements, which, like the APR effective date of the Rule were restricted reset ARMs pose a greater risk of early 286 determination for HOEPA coverage for ARMs under delinquency than other ARMs and to highly creditworthy borrowers. § 1026.32(a)(3), is based on the greater of the fully indexed rate or the initial rate. fixed-rate mortgages, the Bureau This combination of factors post- 283 As discussed, the Bureau proposes to exercise requests additional data or evidence crisis—the sharp drop in ARM its adjustment and revision authorities to amend comparing loan performance of short- originations and the restriction of such § 1026.43(e)(2)(vi) to provide that, to determine the reset ARMs, other ARMs, and fixed-rate originations to highly creditworthy APR for short-reset ARMs for purposes of General QM status, the creditor must treat the maximum mortgages. Moreover, as discussed borrowers, as well as the prevalence of interest rate that may apply during that five-year above, the proposed special rule is low interest rates—likely has muted the period as the interest rate for the full term of the designed to address the risk that, for overall risks of short-reset ARMs. For loan. The Bureau observes that the requirement in consumers with short-reset ARMs, a example, the Assessment Report found TILA section 129C(b)(2)(A)(v) to underwrite ARMs for QM purposes using the maximum interest rate rising-rate environment can lead to that conventional, non-GSE short-reset that may apply during the first five years is at least significantly higher payments and ARMs originated after the effective date ambiguous with respect to whether it delinquencies in the first five years of of the Rule had early delinquency rates independently obligates the creditor to determine the loan term. Therefore, the Bureau of only 0.2 percent.287 Thus, these the APR for short-reset ARMs in the same manner as the proposed special rule, at least where the also requests data comparing the recent originations may not accurately Bureau relies on pricing thresholds as the primary performance of such loans during reflect the potential unaffordability of indicator of likely repayment ability in the periods of rising interest rates. The short-reset ARMs under different market proposed General QM loan definition. Furthermore, Bureau recognizes that rising rates may the Bureau tentatively concludes that it would be 284 reasonable, in light of the proposed definition of a pose some risk of unaffordability for Laurie Goodman et. al., Urban Inst., Housing General QM loan and in light of the policy concerns longer-reset ARMs later in the loan Finance at a Glance (Feb. 2020), at 9, https:// already described, to construe TILA section term. However, as discussed above, the www.urban.org/research/publication/housing- finance-glance-monthly-chartbook-february-2020/ 129C(b)(2)(A)(v) as imposing the same obligations Bureau is proposing the special rule to _ as the proposed special rule in § 1026.43(e)(2)(vi). view/full report. Thus, in addition to relying on its adjustment and address the specific concern that short- 285 Assessment Report, supra note 58, at 94 (fig. revision authorities to amend § 1026.43(e)(2)(vi), 25). the Bureau tentatively concludes that it may do so course of prescribing regulations under TILA 286 Id. at 93–95. under its general authority to interpret TILA in the section 105(a) to carry out the purposes of TILA. 287 Id. at 95 (fig. 26).

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conditions than those that currently to the APOR 290 to determine General on the maximum interest rate during the prevail. QM status. This approach would first five years. Proposed special rule for APR address in a targeted manner the The Bureau considered several determination for short-reset ARMs.288 primary concern about short-reset alternatives to the proposed special rule Given the potential that rising interest ARMs—payment shock—by accounting for certain loans for which the interest rates could cause short-reset ARMs to for the risk of delinquency and default rate may or will change within the first become unaffordable for consumers associated with payment increases five years after the date on which the following consummation and the fact under these loans. And it would do so first regular periodic payment will due. In response to the ANPR, several that the price-based approach may not in a manner that is consistent with the consumer advocates submitted account for some of those risks because five-year framework embedded in the comments suggesting prohibiting of how APRs are determined for ARMs, statutory provision for such ARMs and altogether short-reset ARMs from the Bureau is proposing a special rule to implemented in the current rule. consideration as General QMs. These determine the APR for short-reset ARMs In sum, the proposed special rule is commenters pointed to the high default for purposes of defining General QM consistent with both the statutory and foreclosure rates of such ARMs, the under § 1026.43(e)(2). As noted above, mandate for short-reset ARMs and the complex nature of the product, and in defining QM in TILA, Congress proposed price-based approach. As consumers’ insufficient comprehension adopted a special requirement to discussed above in part V, the rate of the product as justification to deny address affordability concerns for short- spread of APR over APOR is strongly General QM status for ARMs with a reset ARMs. Specifically, the statute correlated with early delinquency rates. fixed-rate period of less than five years. provides that, for an ARM to be a QM, As a result, such rate spreads may The Bureau believes the risks associated the underwriting must be based on the generally serve as an effective proxy for with short-reset ARMs can be effectively maximum interest rate permitted under a consumer’s ability to repay. However, managed without prohibiting them from the terms of the loan during the first five the structure and pricing of ARMs can receiving General QM status, given that years. With the 43 percent DTI limit in result in early interest rate increases that the Dodd-Frank Act explicitly permits the current rule, implementing the five- are not fully accounted for in Regulation short-reset ARMs to be considered as year underwriting requirement is Z provisions for determining the APR General QMs and includes a specific straightforward: The rule requires a for ARMs. Such increases would provision for addressing the potential creditor to calculate DTI using the diminish the effectiveness of the rate for payment shock from such loans. mortgage payment that results from the spread as a proxy, and lead to One of the above-referenced maximum possible interest rate that heightened risk of early delinquency for commenters alternatively recommended could apply during the first five short-reset ARMs relative to other loans the Bureau impose specific limits on years.289 This ensures that the creditor with comparable APRs over APOR rate annual adjustments for short-reset calculates the DTI using the highest spreads. The proposed special rule, by ARMs. The Bureau considered this and interest rate that the consumer may requiring creditors to more fully similar alternatives, including applying experience in the first five years, and incorporate this interest-rate risk in a different rate spread over APOR for the loan is not eligible for QM status determining the APR for short-reset short-reset ARMs. The Bureau under § 1026.43(e)(2) if the DTI ARMs, would help ensure that the anticipates that the proposed approach calculated using that interest rate resulting pricing would account for that would address in a more streamlined exceeds 43 percent. The Bureau is risk for such loans. and targeted manner the core problem, concerned that using the fully indexed The proposed special rule would i.e., that short-reset ARMs could reset to rate to determine the APR for purposes require that the maximum interest rate significantly higher interest rates shortly of the rate spread thresholds in in the first five years be treated as the after consummation resulting in a risk of proposed § 1026.43(e)(2)(vi) would not interest rate for the full term of the loan default from unaffordable payments not provide a sufficiently meaningful to determine the APR. The Bureau is adequately reflected under the standard safeguard against the elevated concerned that a composite APR determination of APR for ARMs. likelihood of delinquency for short-reset determination based on the maximum Further, the Bureau believes that ARMs. For that reason, the Bureau is interest rate in the first five years and including different rate spreads or proposing the special rule for the fully indexed rate for the remaining similar schemes for short-reset ARMs determining the APR for such loans. loan term could understate the APR for and additional subtypes of loans would The Bureau believes the statutory short-reset ARMs by failing to impose unnecessary operational and five-year underwriting requirement sufficiently account for the risk that compliance complexity. provides a basis for the special rule for consumers with such loans could face Proposed comment 43(e)(2)(vi)–4.i determining the APR for short-reset payment shock early in the loan term. explains that provisions in subpart C, including the existing commentary to ARMs for purposes of General QM rate- Accordingly, to account for that risk, § 1026.17(c)(1), address the spread thresholds under § 1026.43(e)(2). and due to concerns about whether it determination of the APR disclosures Specifically, the Bureau is proposing would be appropriate to presume ATR for closed-end credit transactions and that the creditor must determine the for short-reset ARMs without such a that provisions in § 1026.32(a)(3) APR by treating the maximum interest safeguard, the Bureau is proposing that address how to determine the APR to rate that may apply during the first five the APR for short-reset ARMs be based years, as described in proposed determine coverage under § 1026.32(a)(1)(i). It further explains that § 1026.43(e)(2)(vi), as the interest rate 290 This refers to the standard APOR for ARMs. proposed § 1026.43(e)(2)(vi) requires, for for the full term of the loan. That APR The proposed requirement would modify the determination would then be compared determination for the APR of ARMs but would not the purposes of that paragraph, a affect the determination of the APOR. The Bureau different determination of the APR for a notes that the APOR used for step-rate mortgages QM under proposed § 1026.43(e)(2) for 288 As noted above, the proposed special rule would be the ARM APOR because, as with ARMs, would also apply to step-rate mortgages in which the interest rate in step-rate mortgages adjusts and which the interest rate may or will the interest rate changes in the first five years. is not fixed. Thus, the APOR for fixed-rate change within the first five years after 289 12 CFR 1026.43(e)(2)(iv). mortgages would be inapt. the date on which the first regular

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periodic payment will be due. In particular, a purpose of TILA section excluding such loans from General QM addition, proposed comment 129C, as amended by the Dodd-Frank eligibility altogether. 43(e)(2)(vi)–4.i explains that an Act, to assure that consumers are offered 43(e)(4) identical special rule for determining and receive residential mortgage loans the APR for such a loan also applies for on terms that reasonably reflect their TILA section 129C(b)(3)(B)(ii) directs purposes of proposed § 1026.43(b)(4). ability to repay the loans. HUD, VA, USDA, and the Rural Housing Proposed comment 43(e)(2)(vi)–4.ii As also discussed above in part IV, Service (RHS) to prescribe rules explains the application of the special TILA section 129C(b)(3)(B)(i) authorizes defining the types of loans they insure, rule in proposed § 1026.43(e)(2)(vi) for the Bureau to prescribe regulations that guarantee, or administer, as the case determining the APR for a loan for revise, add to, or subtract from the may be, that are QMs. Pending the other which the interest rate may or will criteria that define a QM upon a finding agencies’ implementation of this change within the first five years after that such regulations are necessary or provision, the Bureau included in the the date on which the first regular proper to ensure that responsible, ATR/QM Rule a temporary category of periodic payment will be due. affordable mortgage credit remains QM loans in the special rules in Specifically, it explains that the special available to consumers in a manner § 1026.43(e)(4)(ii)(B) through (E) rule applies to ARMs that have a fixed- consistent with the purposes of section consisting of mortgages eligible to be rate period of five years or less and to 129C, necessary and appropriate to insured or guaranteed (as applicable) by step-rate mortgages for which the effectuate the purposes of section 129C HUD, VA, USDA, and RHS. The Bureau interest rate changes within that five- and section 129B, to prevent also created the Temporary GSE QM year period. circumvention or evasion thereof, or to loan definition, in § 1026.43(e)(4)(ii)(A). Proposed comment 43(e)(2)(vi)–4.iii facilitate compliance with such section. Section 1026.43(e)(4)(i) states that, explains that, to determine the APR for The Bureau is proposing the special notwithstanding § 1026.43(e)(2), a QM is purposes of proposed 43(e)(2)(vi), a rule in § 1026.43(e)(2)(vi) regarding the a covered transaction that satisfies the creditor must treat the maximum APR determination of certain loans for requirements of § 1026.43(e)(2)(i) interest rate that could apply at any time which the interest rate may or will through (iii)—the General QM loan- during the five-year period after the date change pursuant to its authority under feature prohibitions and points-and-fees on which the first regular periodic TILA section 105(a) to make such limits—as well as one or more of the payment will be due as the interest rate adjustments and exceptions as are criteria in § 1026.43(e)(4)(ii). Section for the full term of the loan, regardless necessary and proper to effectuate the 1026.43(e)(4)(ii) states that a QM under of whether the maximum interest rate is purposes of TILA, including that § 1026.43(e)(4) must be a loan that is reached at the first or subsequent consumers are offered and receive eligible under enumerated ‘‘special adjustment during the five-year period. residential mortgage loans on terms that rules’’ to be (A) purchased or guaranteed Further, the proposed comment cross- reasonably reflect their ability to repay by the GSEs while under the references existing comments the loans. The Bureau believes that conservatorship of the FHFA (the 43(e)(2)(iv)–3 and –4 for additional these proposed provisions may ensure Temporary GSE QM loan definition), (B) instruction on how to determine the that General QM status would not be insured by HUD under the National maximum interest rate during the first accorded to short-reset ARMs and Housing Act, (C) guaranteed by VA, (D) five years after the date on which the certain other loans that pose a guaranteed by USDA pursuant to 42 first regular periodic payment will be heightened risk of becoming U.S.C. 1472(h), or (E) insured by RHS. due. unaffordable relatively soon after Section 1026.43(e)(4)(iii)(A) states that Proposed comment 43(e)(2)(vi)–4.iv consummation. The Bureau is also § 1026.43(e)(4)(ii)(B) through (E) shall explains how to use the maximum proposing these provisions pursuant to expire on the effective date of a rule interest rate to determine the APR for its authority under TILA section issued by each respective agency purposes of proposed 129C(b)(3)(B)(i) to revise and add to the pursuant to its authority under TILA § 1026.43(e)(2)(vi). Specifically, the criteria that define a QM. The Bureau section 129C(b)(3)(ii) to define a QM. proposed comment explains that the believes that the proposed APR Section 1026.43(e)(4)(iii)(B) states that, creditor must determine the APR by determination provisions in unless otherwise expired under treating the maximum interest rate § 1026.43(e)(2)(vi) may ensure that § 1026.43(e)(4)(iii)(A), the special rules described in proposed responsible, affordable mortgage credit in § 1026.43(e)(4) are available only for § 1026.43(e)(2)(vi) as the interest rate for remains available to consumers in a covered transactions consummated on the full term of the loan. It further manner consistent with the purpose of or before January 10, 2021. provides an example of how to TILA section 129C, referenced above, as The Bureau proposes to amend determine the APR by treating the well as effectuate that purpose. § 1026.43(e)(4) to state that, maximum interest rate as the interest The Bureau requests comment on all notwithstanding § 1026.43(e)(2), a QM is rate for the full term of the loan. aspects of the proposed special rule in a covered transaction that is defined as As discussed above in part IV, TILA proposed § 1026.43(e)(2)(vi). In a QM by HUD under 24 CFR 201.7 or section 105(a), directs the Bureau to particular, the Bureau requests data 24 CFR 203.19, VA under 38 CFR prescribe regulations to carry out the regarding short-reset ARMs and those 36.4300 or 38 CFR 36.4500, or USDA purposes of TILA, and provides that step-rate mortgages that would be under 7 CFR 3555.109. There are two such regulations may contain additional subject to the proposed special rule, reasons for this proposed amendment. requirements, classifications, including default and delinquency rates First, if the Bureau issues a final rule differentiations, or other provisions, and and the relationship of those rates to in connection with this present may provide for such adjustments and price. The Bureau also requests proposal, the Bureau anticipates that the exceptions for all or any class of comment on alternative approaches for Temporary GSE QM loan definition transactions that the Bureau judges are such loans, including the ones described in § 1026.43(e)(4)(ii)(A) may necessary or proper to effectuate the discussed above, such as imposing expire upon the effective date of such a purposes of TILA, to prevent specific limits on annual rate final rule. This is because, in a separate circumvention or evasion thereof, or to adjustments for short-reset ARMs, proposed rule released simultaneously facilitate compliance therewith. In applying a different rate spread, and with this proposal, the Bureau proposes

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to revise § 1026.43(e)(4)(iii)(B) to state § 1026.43(e)(2)(vi). The Bureau is also debt obligations, alimony, and child that, unless otherwise expired under proposing to remove appendix Q. support. § 1026.43(e)(4)(iii)(A), the special rules Accordingly, the Bureau is proposing VII. Dodd-Frank Act Section 1022(b) in § 1026.43(e)(4) are available only for nonsubstantive conforming changes in Analysis covered transactions consummated on certain provisions to reflect the or before the effective date of a final rule proposed changes to § 1026.43(e)(2)(v) A. Overview issued by the Bureau amending the and (e)(2)(vi) and the proposed removal As discussed above, this proposal General QM loan definition. The Bureau of appendix Q. Specifically, the Bureau would amend the General QM loan may issue a final rule concerning its proposes to update comment 43(c)(7)–1 definition to, among other things, proposal to extend the sunset date in by removing the reference to the DTI remove the specific DTI limit and add § 1026.43(e)(4)(iii)(B) before it issues a limit in § 1026.43(e). The Bureau also a pricing threshold. In developing this final rule concerning this present proposes conforming changes to proposal, the Bureau has considered the proposal (which would amend the provisions related to small creditor QMs potential benefits, costs, and impacts as General QM loan definition). Thus, if in § 1026.43(e)(5)(i) and to balloon- required by section 1022(b)(2)(A) of the the Bureau issues a final rule in payment QMs in § 1026.43(f)(1). Both Dodd-Frank Act. Specifically, section connection with this present proposal, § 1026.43(e)(5) and (f)(1) provide that as 1022(b)(2)(A) of the Dodd-Frank Act such a final rule would remove the part of the respective QM definitions, requires the Bureau to consider the Temporary GSE QM loan definition loans must comply with the potential benefits and costs of a from § 1026.43(e)(4)(ii)(A). requirements to consider and verify regulation to consumers and covered Second, after promulgation of the debts and income in existing persons, including the potential January 2013 Final Rule, each of the § 1026.43(e)(2)(v). As discussed above, reduction of access by consumers to agencies described in the Bureau is proposing to reorganize consumer financial products or services, § 1026.43(e)(4)(ii)(B) through (E) and revise § 1026.43(e)(2)(v) in order to the impact on depository institutions adopted separate definitions of qualified provide that creditors must consider and credit unions with $10 billion or mortgages.291 Under current DTI or residual income and to clarify less in total assets as described in § 1026.43(e)(4)(iii)(A), the special rules the requirements for creditors to section 1026 of the Dodd-Frank Act, and in § 1026.43(e)(4)(ii)(B) through (E) are consider and verify income, debt and the impact on consumers in rural areas. already superseded by the actions of other information. The proposed The Bureau consulted with appropriate HUD, VA, and USDA. The Bureau conforming changes to § 1026.43(e)(5) prudential regulators and other Federal proposes to amend § 1026.43(e)(4) to and (f)(1) would generally insert the agencies regarding the consistency of provide cross-references to each of these substantive requirements of existing the proposed rule with prudential, other agencies’ definitions so that § 1026.43(e)(2)(v) into § 1026.43(e)(5)(i) market, or systemic objectives creditors and practitioners have a single and (f)(1), respectively, and would administered by such agencies as point of reference for all QM definitions. provide that loans under § 1026.43(e)(5) required by section 1022(b)(2)(B) of the The Bureau also proposes to amend and § 1026.43(f) do not have to comply Dodd-Frank Act. The Bureau requests comment 43(e)(4)–1 to reflect the cross- with proposed § 1026.43(e)(2)(v) or comment on the preliminary analysis references to the QM definitions of other (e)(2)(vi). The proposed conforming presented below as well as submissions agencies and to clarify that a covered changes would not insert the of additional data that could inform the transaction that meets another agency’s requirement that lenders consider and Bureau’s analysis of the benefits, costs, definition is a QM for purposes of verify income, debt, and other and impacts. § 1026.43(e). Comment 43(e)(4)–2 would information in accordance with be amended to clarify that covered appendix Q because, as described 1. Data and Evidence transactions that met the requirements elsewhere in this proposal, the Bureau The discussion in these impact of § 1026.43(e)(2)(i) through (iii), were is proposing to remove appendix Q from analyses relies on data from a range of eligible for purchase or guarantee by Regulation Z. The Bureau is also sources. These include data collected or Fannie Mae or Freddie Mac, and were proposing conforming changes to the developed by the Bureau, including consummated prior to the effective date related commentary. HMDA 292 and NMDB 293 data, as well of any final rule promulgated as a result of the proposal would still be Appendix Q to Part 1026—Standards for 292 HMDA requires many financial institutions to considered a QM for purposes of Determining Monthly Debt and Income maintain, report, and publicly disclose loan-level § 1026.43(e) after the adoption of such information about mortgages. These data help show Appendix Q to part 1026 contains whether creditors are serving the housing needs of potential final rule. Comments 43(e)(4)– standards for calculating and verifying their communities; they give public officials 3, –4, and –5 would be amended to debt and income for purposes of information that helps them make decisions and policies; and they shed light on lending patterns indicate that such comments are determining whether a mortgage reserved for future use. The Bureau that could be discriminatory. HMDA was originally satisfies the 43 percent DTI limit for enacted by Congress in 1975 and is implemented requests comment on the proposed General QM loans. As explained in the by Regulation C. See Bureau of Consumer Fin. Prot., amendments to § 1026.43(e)(4) and section-by-section analysis of https://www.consumerfinance.gov/data-research/ related commentary. hmda/. § 1026.43(e)(2)(v)(B) above, the Bureau 293 The NMDB, jointly developed by the FHFA Conforming Changes proposes to remove appendix Q entirely and the Bureau, provides de-identified loan in light of concerns from creditors and characteristics and performance information for a As discussed above, the Bureau is investors that its perceived rigidity, five percent sample of all mortgage originations proposing revisions to § 1026.43(e)(2)(v) ambiguity, and static nature result in from 1998 to the present, supplemented by de- and (e)(2)(vi) that would, among other identified loan and borrower characteristics from standards that are both confusing and things, remove references to appendix Q Federal administrative sources and credit reporting outdated. As noted above, the Bureau data. See Bureau of Consumer Fin. Prot., Sources and remove the DTI ratio limit in seeks comment on its proposal to and Uses of Data at the Bureau of Consumer Financial Protection, at 55–56 (Sept. 2018), https:// 291 78 FR 75215 (Dec. 11, 2013) (HUD); 79 FR remove appendix Q entirely and not to www.consumerfinance.gov/documents/6850/bcfp_ 26620 (May 9, 2014) and 83 FR 50506 (Oct. 9, 2018) retain it as an option for creditors to sources-uses-of-data.pdf. Differences in total market (VA); and 81 FR 26461 (May 3, 2016) (USDA). verify the consumer’s income, assets, size estimates between NMDB data and HMDA data

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as data obtained from industry, other under the Temporary GSE QM loan loan definition.294 In providing the regulatory agencies, and other publicly definition. estimate, the ANPR focused on loans available sources. The Bureau also that fall within the Temporary GSE QM 2. Description of the Baseline conducted the Assessment and issued loan definition but not the General QM the Assessment Report as required The Bureau considers the benefits, loan definition because they have a DTI under section 1022(d) of the Dodd- costs, and impacts of the proposal ratio above 43 percent. This proposal Frank Act. The Assessment Report against the baseline in which the Bureau refers to these loans as High-DTI GSE provides quantitative and qualitative takes no action and the Temporary GSE loans. Based on NMDB data, the Bureau information on questions relevant to the QM loan definition expires on January estimated that there were approximately proposed rule, including the extent to 10, 2021, or when the GSEs exit 6.01 million closed-end first-lien which DTI ratios are probative of a conservatorship, whichever occurs first. residential mortgage originations in the consumer’s ability to repay, the effect of Under the proposal, the amendments to United States in 2018.295 Based on rebuttable presumption status relative to the General QM loan definition would supplemental data provided by the safe harbor status on access to credit, take effect either at the time or after the FHFA, the Bureau estimated that the and the effect of QM status relative to Temporary GSE QM loan definition GSEs purchased or guaranteed 52 non-QM status on access to credit. expires, depending on whether the GSEs percent—roughly 3.12 million—of those Consultations with other regulatory remain in conservatorship on the loans.296 Of those 3.12 million loans, agencies, industry, and research effective date of a final rule issued by the Bureau estimated that 31 percent— organizations inform the Bureau’s the Bureau amending the General QM approximately 957,000 loans—had DTI impact analyses. loan definition. As a result, the ratios greater than 43 percent.297 Thus, The data the Bureau relied upon proposal’s direct market impacts are the Bureau estimated that, as a result of provide detailed information on the considered relative to a baseline in the General QM loan definition’s 43 number, characteristics, pricing, and which the Temporary GSE QM has percent DTI limit, approximately performance of mortgage loans expired and no changes have been made 957,000 loans—16 percent of all closed- originated in recent years. However, it to the General QM loan definition. end first-lien residential mortgage would be useful to supplement these Unless described otherwise, estimated originations in 2018—were High-DTI data with more information relevant to loan counts under the baseline, GSE loans.298 This estimate does not pricing and APR calculations proposal, and alternatives are annual include Temporary GSE QM loans that (particularly PMI costs) for originations estimates. were eligible for purchase by the GSEs before 2018. PMI costs are an important Under the baseline, conventional but were not sold to the GSEs. component of APRs, particularly for loans could receive QM status under the Loans Without Appendix Q-Required loans with smaller down payments, and Bureau’s rules only by underwriting Documentation That Are Otherwise thus should be included or estimated in according to the General QM GSE-Eligible. In addition to High-DTI calculations of rate spreads relative to requirements, Small Creditor QM GSE loans, the Bureau noted that an APOR. The Bureau seeks additional requirements, Balloon Payment QM additional, smaller number of information or data which could inform requirements, or the expanded portfolio Temporary GSE QM loans with DTI quantitative estimates of PMI costs or QM amendments created by the 2018 ratios of 43 percent or less, when APRs for these loans. Economic Growth, Regulatory Relief, calculated using GSE underwriting The data also do not provide and Consumer Protection Act. The guides, may not fall within the General information on creditor costs. As a General QM loan definition, which QM loan definition because their result, analyses of any impacts of the would be the only type of QM available method of verifying income or debt is proposal on creditor costs, particularly to larger creditors for conventional incompatible with appendix Q.299 These realized costs of complying with loans, requires that consumers’ DTI ratio loans would also likely be affected underwriting criteria or potential costs not exceed 43 percent and requires when the Temporary GSE QM loan from legal liability, are based on more creditors to determine debt and income definition expires. The Bureau qualitative information. Similarly, in accordance with the standards in understands, from extensive public estimates of any changes in burden on appendix Q. feedback and its own experience, that consumers resulting from increased or The Bureau anticipates that there are appendix Q does not specifically decreased verification requirements are two main types of conventional loans address whether and how to verify based on qualitative information. that would be affected by the expiration certain forms of income. The Bureau The Bureau seeks additional of the Temporary GSE QM loan understands these concerns are information or data which could inform definition: High-DTI GSE loans (those particularly acute for self-employed quantitative estimates of the number of with DTI ratios above 43 percent) and consumers, consumers with part-time borrowers whose documentation cannot GSE-eligible loans without appendix Q- employment, and consumers with satisfy appendix Q, or the costs to required documentation. These loans borrowers or covered persons of 294 are currently originated as QM loans 84 FR 37155, 37158–59 (July 31, 2019). complying with appendix Q verification 295 due to the Temporary GSE QM loan 84 FR at 37158–59. requirements (or the potential costs of 296 Id. at 37159. definition but may not be originated as complying with appendix Q for 297 Id. The Bureau estimates that 616,000 of these General QM loans, or may not be Temporary GSE QM loans) or the loans were for home purchases, and 341,000 were originated at all, without the proposed refinance loans. In addition, the Bureau estimates proposed verification requirements. The amendments to the General QM loan that the share of these loans with DTI ratios over Bureau also seeks comment or definition. This section 1022 analysis 45 percent has varied over time due to changes in additional information which could market conditions and GSE underwriting standards, refers to these loans as potentially inform quantitative estimates of the rising from 47 percent in 2016 to 56 percent in displaced loans. 2017, and further to 69 percent in 2018. availability, underwriting, and pricing High-DTI GSE Loans. The ANPR 298 Id. at 37159. of non-QM alternatives to loans made provided an estimate of the number of 299 Id. at 37159 n.58. Where these types of loans loans potentially affected by the have DTI ratios above 43 percent, they would be are attributable to differences in coverage and data captured in the estimate above relating to High-DTI construction methodology. expiration of the Temporary GSE QM GSE loans.

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irregular or unusual income streams.300 DTI ratios at or below 43 percent which over the life of a loan. FHA borrowers As a result, these consumers’ access to are or would have been purchased and typically pay different APRs, which can credit may be affected if the Temporary guaranteed as GSE loans under the be higher or lower than APRs for GSE GSE QM loan definition were to expire Temporary GSE QM loan definition— loans depending on a borrower’s credit without amendments to the General QM approximately 2.16 million loans in score and LTV. Borrowers with credit loan definition. 2018—and that continue to be scores at or above 720 pay an APR 30 The Bureau’s analysis of the market originated as General QM loans after the to 60 basis points higher than borrowers under the baseline focuses on High-DTI provision expires would be required to of comparable GSE loans, leading to GSE loans because the Bureau estimates verify income and debts according to higher monthly payments over the life that most potentially displaced loans are appendix Q, rather than only according of the loan. However, FHA borrowers High-DTI GSE loans. The Bureau also to GSE guidelines. Given the concerns with credit scores below 680 and lacks the loan-level documentation and raised about appendix Q’s ambiguity combined LTVs exceeding 85 percent underwriting data necessary to estimate and lack of flexibility, this would likely pay an APR 20 to 40 basis points lower with precision the number of potentially entail both increased documentation than borrowers of comparable GSE displaced loans that do not fall within burden for some consumers as well as loans, leading to lower monthly the other General QM loan requirements increased costs or time-to-origination for payments over the life of the loan.305 and are not High-DTI GSE loans. creditors on some loans.303 For a loan size of $250,000, these APR However, the Assessment did not find differences amount to $2,800 to $5,600 evidence of substantial numbers of B. Potential Benefits and Costs to in additional total monthly payments loans in the non-GSE-eligible jumbo Covered Persons and Consumers over the first five years of mortgage market being displaced when appendix 1. Benefits to Consumers payments for borrowers with credit Q verification requirements became scores above 720, and $1,900 to $3,800 The primary benefit to consumers of effective in 2014.301 Further, the in reduced total monthly payments over the proposal is increased access to Assessment Report found evidence of five years for borrowers with credit credit, largely through the expanded only a limited reduction in the approval scores below 680 and LTVs exceeding availability of High-DTI conventional rate of self-employed applicants for non- 85 percent.306 Thus, all FHA borrowers QM loans. Given the large number of GSE eligible mortgages.302 Based on this are likely to pay higher costs at consumers who obtain High-DTI GSE evidence, along with qualitative origination, while some pay higher loans rather than available alternatives, comparisons of GSE and appendix Q monthly mortgage payments, and others including loans from the private non- verification requirements and available pay lower monthly mortgage payments. QM market and FHA loans, such High- data on the prevalence of borrowers Assuming for comparison that all DTI conventional QM loans may be with non-traditional or difficult-to- 943,000 additional loans falling within preferred due to their pricing, document income (e.g., self-employed the amended General QM loan underwriting requirements, or other borrowers, retired borrowers, those with definition would be made as FHA loans features. Based on HMDA data, the irregular income streams), the Bureau in the absence of the proposal, the Bureau estimates that 943,000 High-DTI estimates this second category of average of the upfront pricing estimates conventional loans in 2018 would fall potentially displaced loans is implies total savings for consumers of outside the QM definitions under the considerably less numerous than the roughly $4 billion per year on upfront baseline, but fall within the proposal’s category of High-DTI GSE loans. costs.307 The total savings or costs over amended General QM loan the life of the loan implied by APR Additional Effects on Loans Not 304 Displaced. While the most significant definition. In addition, some differences would vary substantially market effects under the baseline are consumers who would have been across borrowers depending on credit displaced loans, loans that continue to limited in the amount they could scores, LTVs, and length of time holding be originated as QM loans after the borrow due to the DTI limit under the the mortgage. While this comparison expiration of the Temporary GSE QM baseline would likely be able to obtain assumed all potentially displaced loans loan definition would also be affected. larger mortgages at higher DTI levels. would be made as FHA loans, higher After the expiration date, all loans with Under the baseline, a sizeable share of costs (either upfront or in monthly potentially displaced High-DTI GSE payments) are likely to prevent some 300 For example, in qualitative responses to the loans may instead be originated as FHA borrowers from obtaining loans at all. Bureau’s Lender Survey conducted as part of the loans. Thus, under the proposal, any In the absence of the proposed Assessment, underwriting for self-employed price advantage of GSE or other amendment to the regulation, some of borrowers was one of the most frequently reported conventional QM loans over FHA loans sources of difficulty in originating mortgages using these potentially displaced consumers, appendix Q. These concerns were also raised in would be a realized benefit to comments submitted in response to the Assessment consumers. Based on the Bureau’s 305 The Bureau expects consumers could continue RFI, noting that appendix Q is ambiguous with analysis of 2018 HMDA data, FHA loans to obtain FHA loans where such loans were cheaper respect to how to treat income for consumers who comparable to the loans received by or preferred for other reasons. are self-employed, have irregular income, or want High-DTI GSE borrowers, based on loan 306 Based on NMDB data, the Bureau estimates to use asset depletion as income. See Assessment that the average loan amount among High-DTI GSE Report, supra note 58, at 200. purpose, credit score, and combined borrowers in 2018 was $250,000. While the time to 301 Id. at 107 (‘‘For context, total jumbo purchase LTV ratio, on average have $3,000 to repayment for mortgages varies with economic originations increased from an estimated 108,700 to $5,000 higher upfront total loan costs at conditions, the Bureau estimates that half of 130,200 between 2013 and 2014, based on origination. APRs provide an mortgages are typically closed or paid off five to nationally representative NMDB data.’’). seven years into repayment. Payment comparisons 302 Id. at 118 (‘‘The Application Data indicates alternative, annualized measure of costs based on typical 2018 HMDA APRs for GSE loans, that, notwithstanding concerns that have been 5 percent for borrowers with credit scores over 720, expressed about the challenge of documenting and 303 See part V.B. for additional discussion of and 6 percent for borrowers with credit scores verifying income for self-employed borrowers under concerns raised about appendix Q. below 680 and LTVs exceeding 85. the General QM standard and the documentation 304 This estimate includes only HMDA loans 307 This approximation assumes $4,000 in savings requirements contained in appendix Q to the Rule, which have a reported DTI and rate spread over from total loan costs for all 943,000 consumers. approval rates for non-High DTI, non-GSE eligible APOR, and thus may underestimate the true Actual expected savings would vary substantially self-employed borrowers have decreased only number of loans gaining QM status under the based on loan and credit characteristics, consumer slightly, by two percentage points . . . .’’). proposal. choices, and market conditions.

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particularly those with higher credit under the proposal, due to exceeding continued ability to originate such loans scores and the resources to make larger the pricing thresholds in proposed as General QMs. This is effectively a down payments, likely would be able to § 1026.43(e)(2)(vi). If consumers of such transfer in market share to these obtain credit in the non-GSE private loans are able to obtain non-QM loans creditors from those who primarily market at a cost comparable to or with the amended General QM loan originate FHA or private non-QM loans, slightly higher than the costs for GSE definition in place, they would gain the who likely would have gained market loans, but below the cost of an FHA benefit of the ability-to-repay causes of share under the baseline. loan. As a result, the above cost action and defenses against foreclosure. 3. Costs to Consumers comparisons between GSE and FHA However, some of these consumers may loans provide an estimated upper bound instead obtain FHA loans with QM As discussed above, relative to the on pricing benefits to consumers of the status. baseline, the Bureau estimates that proposal. However, under the baseline, 943,000 additional High-DTI loans 2. Benefits to Covered Persons some potentially displaced consumers could be originated as General QM loans may not obtain loans, and thus would The proposal’s primary benefit to under the proposal. Some of these loans experience benefits of credit access covered persons, specifically mortgage would have been non-QM loans (if under the proposal. As discussed above, creditors, is the expanded profits from originated) under the baseline. As a the Assessment Report found that the originating High-DTI conventional QM result, the proposal is likely to increase January 2013 Final Rule eliminated loans. Under the baseline, creditors the number of consumers who become between 63 and 70 percent of high-DTI would be unable to originate such loans delinquent on QM loans, meaning an home purchase loans that were not under the Temporary GSE QM loan increase in consumers with delinquent Temporary GSE QM loans.308 The definition and would instead have to loans who do not have the benefit of the Bureau requests information or data originate loans with comparable DTI ability-to-repay causes of action and which would inform quantitative ratios as FHA, Small Creditor QM, or defenses against foreclosure. estimates of the number of consumers non-QM loans, or originate at lower DTI Tables 5 and 6 in part V.C provide who may not obtain loans and the costs ratios as conventional General QM historical early delinquency rates for to such consumers. loans. Creditors’ current preference for loans under different combinations of The proposal would also benefit those originating large numbers of High-DTI DTI ratio and rate spread. Under the consumers with incomes difficult to Temporary GSE QMs likely reflects proposal, conventional loans originated verify using appendix Q to obtain advantages in a combination of costs or with rate spreads below 2 percentage General QM status, as the proposed guarantee fees (particularly relative to points and DTI above 43 percent would General QM amendments would no FHA loans), liquidity (particularly newly fall within the amended General longer require the use of appendix Q for relative to Small Creditor QM), or QM loan definition relative to the verification of income. Under the litigation and credit risk (particularly baseline. Based on the number and proposal—as under the current rule— relative to non-QM). Moreover, QM characteristics of 2018 HMDA creditors would be required to verify loans—including Temporary GSE originations, the Bureau estimates 8,000 income and assets in accordance with QMs—are exempt from the Dodd-Frank to 59,000 additional General QM loans § 1026.43(c)(4) and debt obligations, Act risk retention requirement whereby annually could become delinquent alimony, and child support in creditors that securitize mortgage loans within two years of origination, based accordance with § 1026.43(c)(3). The are required to retain at least five on the observed early delinquencies proposal would also state that a creditor percent of the credit risk of the security, from Table 6 (2018) and Table 5 (2002– complies with the General QM which adds significant cost. As a result, 2008), respectively. Further, consumers requirement to verify income, assets, the proposal conveys benefits to who would have been limited in the debt obligations, alimony, and child mortgage creditors originating High-DTI amount they could borrow due to the support where it complies with conventional QMs on each of these DTI limit under the baseline may obtain verification requirements in standards dimensions. larger mortgages at higher DTI levels, the Bureau specifies. The greater In addition, for those lower-DTI GSE further increasing the expected number flexibility of verification standards loans which could satisfy General QM of delinquencies. However, given that allowed under the proposal is likely to requirements, creditors may realize cost many of these loans may have been reduce effort and costs for these savings from underwriting loans using originated as FHA (or other non-General consumers, and in the most difficult the more flexible verification standards QM) loans under the baseline, the cases in which consumers’ allowed under the proposal compared increase in delinquent loans held by documentation cannot satisfy appendix with using appendix Q. Under the consumers without the ability-to-repay Q, the proposal may allow consumers to proposal, creditors would be required to causes of action and defenses against obtain General QM loans rather than consider DTI or residual income in foreclosure is likely smaller than the potential FHA or non-QM alternatives. addition to income and debt but would upper bound estimates cited above. These consumers—likely including self- not need to comply with the appendix For the estimated 28,000 consumers employed borrowers and those with Q standards required for General QM obtaining low-DTI General QM or non-traditional forms of income—would loans under the baseline. For Temporary GSE QM loans priced 2 likely benefit from cost savings under conventional consumers unable to percentage points or more above APOR the proposal, similar to those for High- provide documentation compatible with under the baseline, the amended DTI consumers discussed above. appendix Q, the proposal may allow General QM loan definition may restrict Finally, as noted below under ‘‘Costs such loans to continue receiving QM access to conventional QM credit. There to consumers,’’ the Bureau estimates status, providing comparable benefits to are several possible outcomes for these that 28,000 low-DTI conventional loans creditors as described for High-DTI GSE consumers. Many may instead obtain which are QM under the baseline would loans above. FHA loans, likely paying higher total fall outside the amended QM definition Finally, those creditors whose loan costs as discussed in part VII.B.1. business models rely most heavily on Others may be able to obtain General 308 See Assessment Report supra note 58, at 10– originating High-DTI GSE loans would QM loans priced below 2 percentage 11, 117, 131–47. likely see a competitive benefit from the points over APOR due to creditor

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responses to the proposal or obtain points above APOR or as non-QM or newly fit within the General QM loan loans under the Small Creditor QM other types of QM loans, but in any of definition due to DTI ratios at or below definition. However, some consumers these cases may pay higher costs or 50 percent. may not be able to obtain a mortgage at receive lower revenues relative to under In addition to these effects on the all. The Bureau requests data or the baseline. If creditors are unable to composition of loans within the General evidence that could inform estimates for originate such loans at all, they would QM loan definition, the Bureau uses the the likelihood of these outcomes among see a larger reduction in revenue. historical delinquency rates from Tables consumers with low-DTI General QM or The proposal also generates what are 5 and 6 in part V.C to estimate the Temporary GSE QM loans priced 2 effectively transfers between creditors number of loans expected to become percentage points or more above APOR. relative to the baseline, reflecting delinquent within the General QM loan In addition, the proposal could slow reduced loan origination volume for definition relative to the proposal. The the development of the non-QM market, creditors who primarily originate FHA Bureau estimates that under an particularly new mortgage products or private non-QM loans and increased alternative DTI limit of 45 percent, which may have become available origination volume for creditors who 4,000 to 35,000 fewer General QM loans under the baseline. To the extent that primarily originate conventional QM would become delinquent relative to the some consumers would prefer some of loans. Business models vary proposal, based on delinquency rates for these products to conventional QM substantially within market segments, 2018 and 2002–2008 originations loans due to pricing, verification with portfolio lenders and lenders respectively. Under an alternative DTI flexibility, or other advantages, the originating non-QM loans most likely to limit of 50 percent, the Bureau estimates delay of their development would be a forgo market share gains possible under approximately 1,000 additional General cost to consumers of the proposal. the baseline, while GSE-focused bank QM loans would become delinquent and non-bank creditors are likely to relative to the proposal, due to loans 4. Costs to Covered Persons maintain market share that might be lost priced 2 percentage points or more For creditors retaining the credit risk in the absence of the proposal. above APOR gaining QM status. For an alternative DTI limit of 45 of their General QM mortgages (e.g., 5. Other Benefits and Costs portfolio loans and private percent, these estimates collectively securitizations), an increase in High-DTI The proposal may limit the indicate that substantially fewer loans General QM originations may lead to development of the secondary market would fit within the General QM loan increased risk of credit losses. There is for non-QM mortgage loan securities. definition relative to the proposal, reason to believe, however, that on Under the baseline, those loans that do which would also reduce the number of average the effects on portfolio lenders not fit within General QM requirements General QM loans becoming delinquent. may be small. Creditors that hold loans represent a potential new market for By contrast, the estimates indicate that non-QM securitizations. Thus, the on portfolio have an incentive to verify an alternative DTI limit of 50 percent proposal would reduce the scope of the ability to repay regardless of liability would lead to a comparable number of potential non-QM market, likely under the ATR provisions, because they General QM loans relative to the lowering profits and revenues for hold the credit risk. While portfolio proposal, both overall and among those participants in the private secondary lenders (or those who manage the that would become delinquent. market. This would effectively be a portfolios) may recognize and respond However, consumer and creditor transfer from these non-QM secondary to this incentive to different degrees, the responses to such alternatives, such as market participants to participants in proposed rule is likely on average to reducing loan amounts to lower DTI the agency or other QM loan secondary cause a small increase in the willingness ratios, could increase the number of markets. of these creditors to originate loans with loans that fit within the General QM a greater risk of default and credit 6. Alternatives loan definition relative to the proposal. Other potential alternatives to the losses, such as certain loans with high A potential alternative to the proposed rule could impose a DTI limit DTI ratios. The credit losses to investors proposed rule is maintaining the only for loans above a certain pricing in private securitizations are harder to General QM loan definition’s DTI limit threshold, for example a DTI limit of 50 predict. In general, these losses would but at a higher level, for example, 45 or percent for loans with rate spreads at or depend on the scrutiny that investors 50 percent. The Bureau estimates the above 1 percentage point.310 are willing and able to give to the non- Such an effects of such alternatives relative to alternative would function as a hybrid QM loans under the baseline that the proposed rule, assuming no change become QM loans (with high DTI ratios) of the proposal and an alternative which in consumer or creditor behavior. For an maintains a DTI limit at a higher level, under the proposed rule. It is possible, alternative General QM loan definition however, that the reduction in liability 50 percent in the case of this example. with a DTI limit of 45 percent, the As a result, the number of loans fitting under the ATR provisions would lead to Bureau estimates that 662,000 fewer securitizations with more loans that loans would be General QM due to DTI 310 As discussed in part V.E, a similar approach have a greater risk of default and credit ratios over 45 percent, while 32,000 could impose a DTI limit above a certain pricing losses. additional loans with rate spreads above threshold and also tailor the presumption of In addition, creditors would generally the proposed rule’s QM pricing compliance with the ATR requirement based on no longer be able to originate low-DTI DTI. For example, the rule could provide that (1) thresholds would newly fit within the for loans with rate spreads under 1 percentage conventional loans priced 2 percentage General QM loan definition due to DTI point, the loan is a safe harbor QM regardless of the points or higher above APOR as General ratios at or below 45 percent. For an consumer’s DTI ratio; (2) for loans with rate spreads 309 QMs under the proposal. Creditors alternative DTI limit of 50 percent, the at or above 1 but less than 1.5 percentage points, may be able to originate some of these a loan is a safe harbor QM if the consumer’s DTI Bureau estimates 48,000 fewer loans ratio does not exceed 50 percent and a rebuttable loans at prices below 2 percentage would fit within the General QM loan presumption QM if the consumer’s DTI is above 50 definition due to DTI ratios over 50 percent; and (3) if the rate spread is at or above 1.5 309 The comparable thresholds are 6.5 percentage but less than 2 percentage points, loans would be points over APOR for loans priced under $65,939 percent, while 41,000 additional loans rebuttable presumption QM if the consumer’s DTI and 3.5 percentage points over APOR for loans with rate spreads above the proposed ratio does not exceed 50 percent and non-QM if the priced under $109,898 but at or above $65,939. rule’s QM pricing thresholds would DTI ratio is above 50 percent.

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within the General QM loan definition D. Potential Impact on Rural Areas of a panel to consult with small would generally be between the The proposal’s expected impact on business representatives before Bureau’s estimates for the proposal and rural areas is similar to the expected proposing a rule for which an IRFA is 316 its estimates for the corresponding impact on non-rural areas. Based on required. alternative which maintains the higher 2018 HMDA data, the Bureau estimates An IRFA is not required for this DTI limit. Thus, this hybrid approach that High-DTI conventional purchase proposal because the proposal, if would bring fewer loans within the mortgages originated for homes in rural adopted, would not have a SISNOSE. As General QM loan definition compared to areas are approximately as likely to be the below analysis makes clear, relative the proposal but more loans within the reported as initially sold to the GSEs to the baseline, the proposed rule has General QM loan definition compared to (52.5 percent) as loans in non-rural only one sizeable adverse effect. Certain the alternative DTI limit of 50 percent, areas (52 percent).312 In addition, the loans with DTI ratios under 43 percent both overall and among loans that Bureau estimates that in 2018, 95.6 that would otherwise be originated as would become delinquent. percent of conventional purchase loans rebuttable presumption QM loans under originated for homes in rural areas the baseline would be non-QM loans C. Potential Impact on Depository under the proposal. The proposal would Institutions and Credit Unions With $10 would have been QM loans under the proposal, similar to the Bureau’s also have a number of more minor Billion or Less in Total Assets, as effects on small entities which are not Described in Section 1026 estimate for all conventional purchase loans in rural and non-rural areas (96.1 quantified in this analysis, including The proposal’s expected impact on percent).313 adjustments to the APR calculation used depository institutions and credit for certain ARMs when determining QM unions that are also creditors making VIII. Regulatory Flexibility Act status; amendments to the Rule’s covered loans (depository creditors) Analysis requirements to consider and verify with $10 billion or less in total assets is The Regulatory Flexibility Act (RFA), income, assets, debt obligations, similar to the expected impact on larger as amended by the Small Business alimony, and child support; and the depository creditors and on non- Regulatory Enforcement Fairness Act of addition of DTI as a factor consumers depository creditors. As discussed in 1996, requires each agency to consider may use to rebut the QM presumption part VII.B.4 (Costs to Covered Persons), the potential impact of its regulations on of compliance for loans priced 1.5 depository creditors originating small entities, including small percentage points or more over APOR. portfolio loans may forgo potential businesses, small governmental units, The Bureau expects only small increases market share gains that would occur in and small not-for-profit organizations. or decreases in burden from these more the absence of the proposal. In addition, The RFA defines a ‘‘small business’’ as minor effects. depository creditors with $10 billion or a business that meets the size standard The analysis divides potential less in total assets that originate developed by the Small Business originations into different categories and portfolio loans can originate High-DTI Administration pursuant to the Small considers whether the proposed rule has Small Creditor QM loans under the rule. Business Act.314 any adverse impact on originations These depository creditors may The RFA generally requires an agency relative to the baseline. Note that under currently rely less on the Temporary to conduct an initial regulatory the baseline, the category of Temporary GSE QM loan definition for originating flexibility analysis (IRFA) and a final GSE QM loans no longer exists. The High-DTI loans. If the expiration of the regulatory flexibility analysis (FRFA) of Bureau has identified five categories of Temporary GSE QM loan definition any rule subject to notice-and-comment small entities that may be subject to the would confer a competitive advantage to rulemaking requirements, unless the proposed provisions: Commercial these small creditors in their origination agency certifies that the rule would not banks, savings institutions and credit of High-DTI loans, the proposal would have a significant economic impact on unions (NAICS 522110, 522120, and offset this outcome. a substantial number of small entities 522130) with assets at or below $600 Conversely, those small depository (SISNOSE).315 The Bureau also is million; mortgage brokers (NAICS creditors that primarily rely on the GSEs subject to certain additional procedures 522310) with average annual receipts at as a secondary market outlet because under the RFA involving the convening or below $8 million; and mortgage they do not have the capacity to hold companies (NAICS 522292 and 522298) numerous loans on portfolio or the effects of allowing small depository creditors with average annual receipts at or below infrastructure or scale to securitize loans originate more GSE loans under an expanded $41.5 million. As discussed further may continue to benefit from the ability General QM loan definition relative to the baseline, below, the Bureau relies primarily on while offsetting potential competitive advantages 317 to make High-DTI GSE loans as QM for small depository creditors that originate Small 2018 HMDA data for the analysis. loans. In the absence of the proposal, Creditor QM loans. Type I: First Liens That Are Not Small these creditors would be limited to 312 These statistics are estimated based on Loans, DTI Is Over 43 Percent originating GSE loans as QMs only with originations from the first nine months of the year, to allow time for loans to be sold before HMDA Under the baseline, small entities DTI at or below 43 percent under the reporting deadlines. In addition, a higher share of current General QM loan definition. High-DTI conventional purchase non-rural loans cannot originate Type I loans as safe These creditors may also originate FHA, (33.3 percent) report being sold to other non-GSE harbor or rebuttable presumption QM VA, or USDA loans or non-QM loans for purchasers compared to rural loans (22.3 percent). private securitizations, likely at a higher 313 For alternative approaches, the Bureau 316 5 U.S.C. 609. estimates 84.7 percent of conventional purchase 317 cost relative to originating Temporary Non-depositories are classified as small loans for homes in rural areas would have been entities if they had fewer than 5,188 total GSE QM loans. The proposed rule QMs under a DTI limit of 45 percent, and 95.7 originations in 2018. The classification for non- would allow these creditors to originate percent of conventional purchase loans for homes depositories is based on the SBA small entity more GSE loans under the General QM in rural areas would have been QMs under a DTI definition for mortgage companies (less than $41.5 limit of 50 percent. million in annual revenues) and an estimate of loan definition and have a lower cost of 314 5 U.S.C. 601(3) (the Bureau may establish an 311 $8,000 for revenue-per-origination from the origination relative to the baseline. alternative definition after consultation with the Assessment Report, supra note 58, at 78. The Small Business Administration and an opportunity HMDA data do not directly distinguish mortgage 311 Alternative approaches, such as retaining a for public comment). brokers from mortgage companies, so the more DTI limit of 45 or 50 percent, would have similar 315 5 U.S.C. 603–605. inclusive revenue threshold is used.

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loans unless they are also small Type IV: Closed-End Subordinate-Liens the overall number of small entities that creditors and comply with the originate mortgage credit. additional requirements of the small Under the baseline, small entities can Accordingly, the Director certifies that creditor QM category. Neither the originate these loans as General QM this proposal, if adopted, would not removal of DTI requirements nor the loans if they have DTI ratios at or below have a significant economic impact on the DTI limit of 43 percent. The addition of the pricing conditions have a substantial number of small entities. proposal’s amended General QM loan an adverse impact on the ability of small The Bureau requests comment on its definition creates new pricing entities to originate these loans. analysis of the impact of the proposal on thresholds for subordinate-lien small entities and requests any relevant Type II: First Liens That Are Not Small originations. Subordinate-lien loans data. Loans, DTI Is 43 Percent or Under under $65,939 with APR less than 6.5 percentage points over APOR and larger IX. Paperwork Reduction Act Under the baseline, small entities can subordinate-lien loans with APR less Under the Paperwork Reduction Act originate these loans as either safe than 3.5 percentage points over APOR of 1995 (PRA),318 Federal agencies are harbor QM or rebuttable presumption can be originated as General QM loans, generally required to seek, prior to QM, depending on pricing. The removal assuming they meet all other General implementation, approval from the of DTI requirements has no adverse QM requirements. The proposal would Office of Management and Budget impact on the ability of small entities to prevent small creditors from originating (OMB) for information collection originate these loans. The addition of low-DTI, subordinate-lien loans with requirements. Under the PRA, the the pricing conditions has no adverse APR at or above these thresholds as Bureau may not conduct or sponsor, impact on the ability of small creditors General QM loans. For the SISNOSE and, notwithstanding any other to originate these loans as safe harbor analysis below, the Bureau provision of law, a person is not QM loans: A loan with APR within 1.5 conservatively assumes that none of required to respond to, an information percentage points of APOR that can be these loans would be originated. collection unless the information collection displays a valid control originated as a safe harbor QM loan Analysis under the baseline can be originated as number assigned by OMB. The Bureau has determined that this a safe harbor QM loan under the pricing For purposes of this analysis, the proposal does not contain any new or conditions of the proposed rule. Bureau assumes that average annual receipts for small entities is substantively revised information Similarly, the addition of the pricing collection requirements other than those conditions has no adverse impact on the proportional to mortgage loan origination volume. The Bureau further previously approved by OMB under ability of small creditors to originate OMB control number 3170–0015. The rebuttable presumption QM loans with assumes that a small entity experiences a significant negative effect from the proposal would amend 12 CFR part APR between 1.5 percentage points and 1026 (Regulation Z), which implements 2 percentage points over APOR. The proposed rule if the proposed rule would cause a reduction in origination TILA. OMB control number 3170–0015 addition of the pricing conditions is the Bureau’s OMB control number for would, however, prevent small creditors volume of over 2 percent. Using the 2018 HMDA data, the Bureau estimates Regulation Z. from originating rebuttable presumption The Bureau welcomes comments on that if none of the Type II, III, or IV QM loans with APR 2 percentage points these determinations or any other aspect loans adversely affected were or more over APOR. In the SISNOSE of the proposal for purposes of the PRA. originated, 149 small entities would analysis below, the Bureau experience a loss of over 2 percent in X. Signing Authority conservatively assumes that none of mortgage loan origination volume. Thus, these loans would be originated. The Director of the Bureau, having there are at most 149 small entities that reviewed and approved this document, Type III: First-Liens That Are Small experience a significant adverse is delegating the authority to Loans economic impact. The Bureau estimates electronically sign this document to that there are 2,027 small entities in the Laura Galban, a Bureau Federal Register Under the baseline, small entities can HMDA data. 149 is not a substantial Liaison, for purposes of publication in originate these loans as General QM number relative to 2,027. the Federal Register. loans if they have DTI ratios at or below The Bureau recognizes that there are List of Subjects in 12 CFR Part 1026 the DTI limit of 43 percent. The small entities that originate mortgage proposal’s amended General QM loan credit that do not report HMDA data. Advertising, Banks, Banking, definition preserves QM status for some The Bureau has no reason to expect, Consumer protection, Credit, Credit smaller, low-DTI loans priced 2 however, that small entities that unions, Mortgages, National banks, percentage points or more over APOR. originate mortgage credit that do not Reporting and recordkeeping Specifically, loans under $65,939 with report HMDA data would be affected requirements, Savings associations, APR less than 6.5 percentage points differently from small HMDA reporters Truth-in-lending. over APOR and loans under $109,898 by the proposed rule. In other words, Authority and Issuance with APR less than 3.5 percentage the Bureau expects that including points over APOR can be originated as HMDA non-reporters in the analysis For the reasons set forth above, the General QM loans, assuming they meet would increase the number of small Bureau proposes to amend Regulation Z, all other General QM requirements. The entities that would experience a loss of 12 CFR part 1026, as set forth below: proposal would prevent small creditors over 2 percent in mortgage loan PART 1026—TRUTH IN LENDING from originating smaller, low-DTI loans origination volume and the number of (REGULATION Z) with APR at or above these higher relevant small entities by the same thresholds as General QM loans. For the proportion. Thus, the overall number of ■ 1. The authority citation for part 1026 SISNOSE analysis below, the Bureau small entities that would experience a continues to read as follows: conservatively assumes that none of significant adverse economic impact these loans would be originated. would not be a substantial number of 318 44 U.S.C. 3501 et seq.

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Authority: 12 U.S.C. 2601, 2603–2605, third-party records that provide (5) * * * 2607, 2609, 2617, 3353, 5511, 5512, 5532, reasonably reliable evidence of the (i) * * * 5581; 15 U.S.C. 1601 et seq. consumer’s income or assets, in (A) That satisfies the requirements of paragraph (e)(2) of this section other Subpart E—Special Rules for Certain accordance with paragraph (c)(4) of this Home Mortgage Transactions section; and than the requirements of paragraphs (2) Verifies the consumer’s current (e)(2)(v) and (vi); ■ 2. Amend § 1026.43 by revising debt obligations, alimony, and child (B) For which the creditor: paragraphs (b)(4), (e)(2)(v) and (vi), support using reasonably reliable third- (1) Considers and verifies at or before (e)(4), (e)(5)(i)(A) and (B), and (f)(1)(i) party records in accordance with consummation the consumer’s current and (iii) to read as follows: paragraph (c)(3) of this section. or reasonably expected income or assets (vi) For which the annual percentage other than the value of the dwelling § 1026.43 Minimum standards for (including any real property attached to transactions secured by a dwelling. rate does not exceed the average prime offer rate for a comparable transaction as the dwelling) that secures the loan, in * * * * * of the date the interest rate is set by the accordance with paragraphs (c)(2)(i) and (b) * * * (c)(4) of this section; (4) Higher-priced covered transaction amounts specified in paragraphs (2) Considers and verifies at or before means a covered transaction with an (e)(2)(vi)(A) through (E) of this section. consummation the consumer’s current annual percentage rate that exceeds the The amounts specified here shall be debt obligations, alimony, and child average prime offer rate for a adjusted annually on January 1 by the support in accordance with paragraphs comparable transaction as of the date annual percentage change in the Consumer Price Index for All Urban (c)(2)(vi) and (c)(3) of this section; the interest rate is set by 1.5 or more (3) Considers at or before percentage points for a first-lien covered Consumers (CPI–U) that was reported on the preceding June 1. For purposes consummation the consumer’s monthly transaction, other than a qualified debt-to-income ratio or residual income mortgage under paragraph (e)(5), (e)(6), of this paragraph (e)(2)(vi), the creditor must determine the annual percentage and verifies the debt obligations and or (f) of this section; by 3.5 or more income used to determine that ratio in percentage points for a first-lien covered rate for a loan for which the interest rate may or will change within the first five accordance with paragraph (c)(7) of this transaction that is a qualified mortgage section, except that the calculation of under paragraph (e)(5), (e)(6), or (f) of years after the date on which the first regular periodic payment will be due by the payment on the covered transaction this section; or by 3.5 or more for purposes of determining the percentage points for a subordinate-lien treating the maximum interest rate that may apply during that five-year period consumer’s total monthly debt covered transaction. For purposes of a obligations in paragraph (c)(7)(i)(A) qualified mortgage under paragraph as the interest rate for the full term of the loan. shall be determined in accordance with (e)(2) of this section, for a loan for paragraph (e)(2)(iv) of this section which the interest rate may or will (A) For a first-lien covered transaction with a loan amount greater than or equal instead of paragraph (c)(5) of this change within the first five years after section; the date on which the first regular to $109,898 (indexed for inflation), 2 or periodic payment will be due, the more percentage points; * * * * * creditor must determine the annual (B) For a first-lien covered transaction (f) * * * percentage rate for purposes of this with a loan amount greater than or equal (1) * * * paragraph (b)(4) by treating the to $65,939 (indexed for inflation) but (i) The loan satisfies the requirements maximum interest rate that may apply less than $109,898 (indexed for for a qualified mortgage in paragraphs during that five-year period as the inflation), 3.5 or more percentage (e)(2)(i)(A) and (e)(2)(ii) and (iii) of this interest rate for the full term of the loan. points; section; (C) For a first-lien covered transaction * * * * * * * * * * with a loan amount less than $65,939 (e) * * * (iii) The creditor: (2) * * * (indexed for inflation), 6.5 or more (A) Considers and verifies at or before (v) For which the creditor, at or before percentage points; consummation the consumer’s current consummation: (D) For a subordinate-lien covered or reasonably expected income or assets (A) Considers the consumer’s income transaction with a loan amount greater other than the value of the dwelling or assets, debt obligations, alimony, than or equal to $65,939 (indexed for (including any real property attached to child support, and monthly debt-to- inflation), 3.5 or more percentage the dwelling) that secures the loan, in income ratio or residual income, using points; accordance with paragraphs (c)(2)(i) and the amounts determined from paragraph (E) For a subordinate-lien covered (c)(4) of this section; (e)(2)(v)(B) of this section. For purposes transaction with a loan amount less than (B) Considers and verifies at or before of this paragraph (e)(2)(v)(A), the $65,939 (indexed for inflation), 6.5 or consummation the consumer’s current consumer’s monthly debt-to-income more percentage points. debt obligations, alimony, and child ratio or residual income is determined * * * * * support in accordance with paragraphs in accordance with paragraph (c)(7) of (4) Qualified mortgage defined—other (c)(2)(vi) and (c)(3) of this section; this section, except that the consumer’s agencies. Notwithstanding paragraph (C) Considers at or before monthly payment on the covered (e)(2) of this section, a qualified consummation the consumer’s monthly transaction, including the monthly mortgage is a covered transaction that is debt-to-income ratio or residual income payment for mortgage-related defined as a qualified mortgage by the and verifies the debt obligations and obligations, is calculated in accordance U.S. Department of Housing and Urban income used to determine that ratio in with paragraph (e)(2)(iv) of this section. Development under 24 CFR 201.7 and accordance with paragraph (c)(7) of this (B)(1) Verifies the consumer’s current 24 CFR 203.19, the U.S. Department of section, except that the calculation of or reasonably expected income or assets Veterans Affairs under 38 CFR 36.4300 the payment on the covered transaction other than the value of the dwelling and 38 CFR 36.4500, or the U.S. for purposes of determining the (including any real property attached to Department of Agriculture under 7 CFR consumer’s total monthly debt the dwelling) that secures the loan using 3555.109. obligations in (c)(7)(i)(A) shall be

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determined in accordance with interest rate may or will change. not meet the requirements of paragraph (f)(1)(iv)(A) of this section, Provisions in subpart C of this part, § 1026.43(c)(4) where it observes an together with the consumer’s monthly including the commentary to unidentified $5,000 deposit in the payments for all mortgage-related § 1026.17(c)(1), address how to consumer’s account but fails to take any obligations and excluding the balloon determine the annual percentage rate measures to confirm or lacks any basis payment; disclosures for closed-end credit to conclude that the deposit represents * * * * * transactions. Provisions in the consumer’s personal income and § 1026.32(a)(3) address how to not, for example, proceeds from the Appendix Q to Part 1026 [Removed] determine the annual percentage rate to disbursement of a loan. ■ 3. Remove Appendix Q to Part 1026. determine coverage under * * * * * ■ 4. In Supplement I to Part 1026— § 1026.32(a)(1)(i). Section 1026.43(b)(4) Official Interpretations, under Section requires, only for the purposes of a 43(c)(7) Monthly Debt-to-Income Ratio 1026.43—Minimum Standards for qualified mortgage under or Residual Income Transactions Secured by a Dwelling: § 1026.43(e)(2), a different 1. Monthly debt-to-income ratio or ■ a. Revise 43(b)(4), 43(c)(4), and determination of the annual percentage monthly residual income. Under 43(c)(7); rate for purposes of § 1026.43(b)(4) for a § 1026.43(c)(2)(vii), the creditor must ■ b. Revise Paragraph 43(e)(2)(v); loan for which the interest rate may or consider the consumer’s monthly debt- ■ c. Add Paragraphs 43(e)(2)(v)(A) and will change within the first five years to-income ratio, or the consumer’s 43(e)(2)(v)(B) (after Paragraph after the date on which the first regular monthly residual income, in accordance 43(e)(2)(v)); periodic payment will be due. See with the requirements in § 1026.43(c)(7). ■ d. Revise Paragraph 43(e)(2)(vi); comment 43(e)(2)(vi)–4 for how to ■ Section 1026.43(c) does not prescribe a e. Revise 43(e)(4); and determine the annual percentage rate of specific monthly debt-to-income ratio ■ f. Revise Paragraph 43(e)(5), such a loan. with which creditors must comply. Paragraph 43(f)(1)(i), and e Paragraph Instead, an appropriate threshold for a 43(f)(1)(iii). * * * * * consumer’s monthly debt-to-income The revisions and additions read as 43(c)(4) Verification of Income or follows: ratio or monthly residual income is for Assets the creditor to determine in making a Supplement I to Part 1026—Official 1. Income or assets relied on. A reasonable and good faith determination Interpretations creditor need consider, and therefore of a consumer’s ability to repay. * * * * * need verify, only the income or assets 2. Use of both monthly debt-to-income the creditor relies on to evaluate the ratio and monthly residual income. If a Section 1026.43—Minimum Standards consumer’s repayment ability. See creditor considers the consumer’s for Transactions Secured by a Dwelling comment 43(c)(2)(i)–2. For example, if a monthly debt-to-income ratio, the * * * * * consumer’s application states that the creditor may also consider the consumer earns a salary and is paid an consumer’s residual income as further 43(b)(4) Higher-Priced Covered annual bonus and the creditor relies on validation of the assessment made using Transaction only the consumer’s salary to evaluate the consumer’s monthly debt-to-income 1. Average prime offer rate. The the consumer’s repayment ability, the ratio. average prime offer rate is defined in creditor need verify only the salary. See 3. Compensating factors. The creditor § 1026.35(a)(2). For further explanation also comments 43(c)(3)–1 and –2. may consider factors in addition to the of the meaning of ‘‘average prime offer 2. Multiple applicants. If multiple monthly debt-to-income ratio or rate,’’ and additional guidance on consumers jointly apply for a loan and residual income in assessing a determining the average prime offer each lists income or assets on the consumer’s repayment ability. For rate, see comments 35(a)(2)–1 through application, the creditor need verify example, the creditor may reasonably –4. only the income or assets the creditor and in good faith determine that a 2. Comparable transaction. A higher- relies on in determining repayment consumer has the ability to repay priced covered transaction is a ability. See comment 43(c)(2)(i)–5. despite a higher debt-to-income ratio or consumer credit transaction that is 3. Tax-return transcript. Under lower residual income in light of the secured by the consumer’s dwelling § 1026.43(c)(4), a creditor may verify a consumer’s assets other than the with an annual percentage rate that consumer’s income using an Internal dwelling, including any real property exceeds by the specified amount the Revenue Service (IRS) tax-return attached to the dwelling, securing the average prime offer rate for a transcript, which summarizes the covered transaction, such as a savings comparable transaction as of the date information in a consumer’s filed tax account. The creditor may also the interest rate is set. The published return, another record that provides reasonably and in good faith determine tables of average prime offer rates reasonably reliable evidence of the that a consumer has the ability to repay indicate how to identify a comparable consumer’s income, or both. A creditor despite a higher debt-to-income ratio in transaction. See comment 35(a)(2)–2. may obtain a copy of a tax-return light of the consumer’s residual income. 3. Rate set. A transaction’s annual transcript or a filed tax return directly * * * * * percentage rate is compared to the from the consumer or from a service average prime offer rate as of the date provider. A creditor need not obtain the Paragraph 43(e)(2)(v) the transaction’s interest rate is set (or copy directly from the IRS or other 1. General. For guidance on satisfying ‘‘locked’’) before consummation. taxing authority. See comment 43(c)(3)– § 1026.43(e)(2)(v), a creditor may rely on Sometimes a creditor sets the interest 2. commentary to § 1026.43(c)(2)(i) and rate initially and then re-sets it at a 4. Unidentified funds. A creditor does (vi), (c)(3), and (c)(4). different level before consummation. not meet the requirements of The creditor should use the last date the § 1026.43(c)(4) if it observes an inflow of Paragraph 43(e)(2)(v)(A) interest rate is set before consummation. funds into the consumer’s account 1. Consider. In order to comply with 4. Determining the annual percentage without confirming that the funds are the requirement to consider income or rate for certain loans for which the income. For example, a creditor would assets, debt obligations, alimony, child

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support, and monthly debt-to-income underwriting that creditors must use. ii. Applicable provisions in standards. ratio or residual income under Section 1026.43(e)(2)(v)(B)(1) requires a A creditor complies with § 1026.43(e)(2)(v)(A), a creditor must creditor to verify the consumer’s current § 1026.43(e)(2)(v)(B) if it complies with take into account income or assets, debt or reasonably expected income or assets requirements in the standards listed in obligations, alimony, child support, and (including any real property attached to comment 43(e)(2)(v)(B)–3 for creditors monthly debt-to-income ratio or the value of the dwelling) that secures to verify income, assets, debt residual income in its ability-to-repay the loan in accordance with obligations, alimony and child support determination. Under § 1026.25(a), a § 1026.43(c)(4), which states that a using specified documents or to include creditor must retain documentation creditor must verify such amounts using or exclude particular inflows, property, showing how it took into account third-party records that provide and obligations as income, assets, debt income or assets, debt obligations, reasonably reliable evidence of the obligations, alimony, and child support. alimony, child support, and monthly consumer’s income or assets. Section iii. Inapplicable provisions in debt-to-income ratio or residual income 1026.43(e)(2)(v)(B)(2) requires a creditor standards. For purposes of compliance in its ability-to-repay determination. to verify the consumer’s current debt with § 1026.43(e)(2)(v)(B), a creditor Examples of such documentation may obligations, alimony, and child support need not comply with requirements in include, for example, an underwriter in accordance with § 1026.43(c)(3), the standards listed in comment worksheet or a final automated which states that a creditor must verify 43(e)(2)(v)(B)–3 other than those that underwriting system certification, alone such amounts using reasonably reliable require lenders to verify income, assets, or in combination with the creditor’s third-party records. So long as a creditor debt obligations, alimony and child applicable underwriting standards, that complies with the provisions of support using specified documents or to shows how these required factors were § 1026.43(c)(3) with respect to debt classify and count particular inflows, taken into account in the creditor’s obligations, alimony, and child support property, and obligations as income, ability-to-repay determination. and § 1026.43(c)(4) with respect to assets, debt obligations, alimony, and 2. Requirement to consider monthly income and assets, the creditor is child support. debt-to-income ratio or residual income. permitted to use any reasonable iv. Revised versions of standards. A Section 1026.43(e)(2)(v)(A) does not verification methods and criteria. creditor also complies with prescribe specifically how a creditor 2. Classifying and counting income, § 1026.43(e)(2)(v)(B) where it complies must consider monthly debt-to-income assets, debt obligations, alimony, and with revised versions of the standards ratio or residual income. Section child support. ‘‘Current and reasonably listed in comment 43(e)(2)(v)(B)–3.i, 1026.43(e)(2)(v)(A) also does not expected income or assets other than the provided that the two versions are prescribe a particular monthly debt-to- value of the dwelling (including any substantially similar. income ratio or residual income real property attached to the dwelling) threshold with which a creditor must that secures the loan’’ is determined in v. Use of standards from more than comply. A creditor may, for example, accordance with § 1026.43(c)(2)(i) and one document. A creditor complies with consider monthly debt-to-income ratio its commentary. ‘‘Current debt § 1026.43(e)(2)(v)(B) if it complies with or residual income by establishing obligations, alimony, and child the verification standards in one or monthly debt-to-income or residual support’’ has the same meaning as more of the documents specified in income thresholds for its own under § 1026.43(c)(2)(vi) and its comment 43(e)(2)(v)(B)–3.i. underwriting standards and commentary. Section 1026.43(c)(2)(i) Accordingly, a creditor may, but need documenting how it applied those and (vi) and the associated commentary not, comply with § 1026.43(e)(2)(v)(B) thresholds to determine the consumer’s apply to a creditor’s determination with by complying with the verification ability to repay. A creditor may also respect to what inflows and property it standards from more than one document consider these factors by establishing may classify and count as income or (in other words, by ‘‘mixing and monthly debt-to-income or residual assets and what obligations it must matching’’ verification standards). income thresholds and exceptions to classify and count as debt obligations, Paragraph 43(e)(2)(vi) those thresholds based on other alimony, and child support, pursuant to compensating factors, and documenting its compliance with 1. Determining the average prime offer application of the thresholds along with § 1026.43(e)(2)(v)(B). rate for a comparable transaction as of any applicable exceptions. 3. Safe harbor for compliance with the date the interest rate is set. For 3. Flexibility to consider additional specified external standards. guidance on determining the average factors related to a consumer’s ability to i. Meeting the standards in the prime offer rate for a comparable repay. The requirement to consider following documents for verifying transaction as of the date the interest income or assets, debt obligations, current or reasonably expected income rate is set, see comments 43(b)(4)–1 alimony, child support, and monthly or assets using third-party records through –3. debt-to-income ratio or residual income provides a creditor with reasonably 2. Determination of applicable does not preclude the creditor from reliable evidence of the consumer’s threshold. A creditor must determine taking into account additional factors income or assets. Meeting the standards the applicable threshold by determining that are relevant in determining a in the following documents for verifying which category the loan falls into based consumer’s ability to repay the loan. For current debt obligations, alimony, and on the face amount of the note (the guidance on considering additional child support obligation using third- ‘‘loan amount’’ as defined in factors in determining the consumer’s party records provides a creditor with § 1026.43(b)(5)). For example, for a first- ability to repay, see comment 43(c)(7)– reasonably reliable evidence of the lien covered transaction with a loan 3. consumer’s debt obligations, alimony, amount of $75,000, the loan would fall and child support obligations. into the tier for loans greater than or Paragraph 43(e)(2)(v)(B) Accordingly, a creditor complies with equal to $65,939 (indexed for inflation) 1. Verification of income, assets, debt § 1026.43(e)(2)(v)(B) if it complies with but less than $109,898 (indexed for obligations, alimony, and child support. verification standards in one or more of inflation), for which the applicable Section 1026.43(e)(2)(v)(B) does not the following documents: [List to be threshold is 3.5 or more percentage prescribe specific methods of Determined, as Discussed in Preamble]. points.

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3. Annual adjustment for inflation. percentage rate. For a loan for which the satisfy the requirements for a qualified The dollar amounts in interest rate may or will change within mortgage under § 1026.43(e)(2), other § 1026.43(e)(2)(vi) will be adjusted the first five years after the date on than the requirements in annually on January 1 by the annual which the first regular periodic payment § 1026.43(e)(2)(v) and (vi). For example, percentage change in the CPI–U that will be due, the creditor must determine a qualified mortgage under was in effect on the preceding June 1. the annual percentage rate for purposes § 1026.43(e)(5) may not have a loan term The Bureau will publish adjustments of § 1026.43(e)(2)(vi) by treating the in excess of 30 years because longer after the June figures become available maximum interest rate that may apply terms are prohibited for qualified each year. within the first five years as the interest mortgages under § 1026.43(e)(2)(ii). 4. Determining the annual percentage rate for the full term of the loan. For Similarly, a qualified mortgage under rate for certain loans for which the example, assume an adjustable-rate § 1026.43(e)(5) may not result in a interest rate may or will change. mortgage with a loan term of 30 years balloon payment because i. In general. The commentary to and an initial discounted rate of 5.0 § 1026.43(e)(2)(i)(C) provides that § 1026.17(c)(1) and other provisions in percent that is fixed for the first three qualified mortgages may not have subpart C address how to determine the years. Assume that the maximum balloon payments except as provided annual percentage rate disclosures for interest rate during the first five years under § 1026.43(f). However, a covered closed-end credit transactions. after the date on which the first regular transaction need not comply with Provisions in § 1026.32(a)(3) address periodic payment will be due is 7.0 § 1026.43(e)(2)(v) and (vi). how to determine the annual percentage percent. Pursuant to § 1026.43(e)(2)(vi), 2. Debt-to-income ratio or residual rate to determine coverage under the creditor must determine the annual income. Section 1026.43(e)(5) does not § 1026.32(a)(1)(i). Section percentage rate based on an interest rate prescribe a specific monthly debt-to- 1026.43(e)(2)(vi) requires, for the of 7.0 percent applied for the full 30- income ratio with which creditors must purposes of § 1026.43(e)(2)(vi), a year loan term. comply. Instead, creditors must different determination of the annual * * * * * consider a consumer’s debt-to-income percentage rate for a qualified mortgage ratio or residual income calculated under § 1026.43(e)(2) for which the 43(e)(4) Qualified Mortgage Defined— generally in accordance with interest rate may or will change within Other Agencies § 1026.43(c)(7) and verify the the first five years after the date on 1. General. The Department of information used to calculate the debt- which the first regular periodic payment Housing and Urban Development, to-income ratio or residual income in will be due. An identical special rule for Department of Veterans Affairs, and the accordance with § 1026.43(c)(3) and (4). determining the annual percentage rate Department of Agriculture have However, § 1026.43(c)(7) refers creditors for such a loan also applies for purposes promulgated definitions for qualified to § 1026.43(c)(5) for instructions on of § 1026.43(b)(4). mortgages under mortgage programs calculating the payment on the covered ii. Loans for which the interest rate they insure, guarantee, or provide under transaction. Section 1026.43(c)(5) may or will change. Section applicable law. Cross-references to those requires creditors to calculate the 1026.43(e)(2)(vi) includes a special rule definitions are listed in § 1026.43(e)(4) payment differently than for determining the annual percentage to acknowledge the covered transactions § 1026.43(e)(2)(iv). For purposes of the rate for a loan for which the interest rate covered by those definitions are qualified mortgage definition in may or will change within the first five qualified mortgages for purposes of this § 1026.43(e)(5), creditors must base their years after the date on which the first section. calculation of the consumer’s debt-to- regular periodic payment will be due. 2. Mortgages originated prior to income ratio or residual income on the This rule applies to adjustable-rate [effective date of final rule]. Covered payment on the covered transaction mortgages that have a fixed-rate period transactions that met the requirements calculated according to of five years or less and to step-rate of § 1026.43(e)(2)(i) thorough (iii), were § 1026.43(e)(2)(iv) instead of according mortgages for which the interest rate eligible for purchase or guarantee by the to § 1026.43(c)(5). changes within that five-year period. Federal National Mortgage Association 3. Forward commitments. A creditor iii. Maximum interest rate during the (Fannie Mae) or the Federal Home Loan may make a mortgage loan that will be first five years. For a loan for which the Mortgage Corporation (Freddie Mac) (or transferred or sold to a purchaser interest rate may or will change within any limited-life regulatory entity pursuant to an agreement that has been the first five years after the date on succeeding the charter of either) entered into at or before the time the which the first regular periodic payment operating under the conservatorship or transaction is consummated. Such an will be due, a creditor must treat the receivership of the Federal Housing agreement is sometimes known as a maximum interest rate that could apply Finance Agency pursuant to section ‘‘forward commitment.’’ A mortgage that at any time during that five-year period 1367 of the Federal Housing Enterprises will be acquired by a purchaser as the interest rate for the full term of Financial Safety and Soundness Act of pursuant to a forward commitment does the loan to determine the annual 1992 (12 U.S.C. 4617), and were not satisfy the requirements of percentage rate for purposes of consummated prior to [effective date of § 1026.43(e)(5), whether the forward § 1026.43(e)(2)(vi), regardless of whether final rule] continue to be qualified commitment provides for the purchase the maximum interest rate is reached at mortgages for the purposes of this and sale of the specific transaction or for the first or subsequent adjustment section. the purchase and sale of transactions during the five-year period. For 3. [RESERVED]. with certain prescribed criteria that the additional instruction on how to 4. [RESERVED]. transaction meets. However, a forward determine the maximum interest rate 5. [RESERVED]. commitment to another person that also during the first five years after the date meets the requirements of on which the first regular periodic Paragraph 43(e)(5) § 1026.43(e)(5)(i)(D) is permitted. For payment will be due. See comments 1. Satisfaction of qualified mortgage example, assume a creditor that is 43(e)(2)(iv)–3 and –4. requirements. For a covered transaction eligible to make qualified mortgages iv. Treatment of the maximum to be a qualified mortgage under under § 1026.43(e)(5) makes a mortgage. interest rate in determining the annual § 1026.43(e)(5), the mortgage must If that mortgage meets the purchase

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criteria of an investor with which the months after consummation, Creditor A agencies to revive troubled creditors and creditor has an agreement to sell loans sells the qualified mortgage to Creditor resolve failed creditors. A qualified after consummation, then the loan does B pursuant to § 1026.43(e)(5)(ii)(B) and mortgage under § 1026.43(e)(5) retains not meet the definition of a qualified the loan retains its qualified mortgage its qualified mortgage status if it is sold, mortgage under § 1026.43(e)(5). status because Creditor B complies with assigned, or otherwise transferred to However, if the investor meets the the limits on asset size and number of another person pursuant to: A capital requirements of § 1026.43(e)(5)(i)(D), the transactions. If Creditor B sells the restoration plan or other action under 12 mortgage will be a qualified mortgage if qualified mortgage, it will lose its U.S.C. 1831o; the actions or instructions all other applicable criteria also are qualified mortgage status under of any person acting as conservator, satisfied. § 1026.43(e)(5) unless the sale qualifies receiver or bankruptcy trustee; an order 4. Creditor qualifications. To be for one of the § 1026.43(e)(5)(ii) of a State or Federal government agency eligible to make qualified mortgages exceptions for sales three or more years with jurisdiction to examine the creditor under § 1026.43(e)(5), a creditor must after consummation, to another pursuant to State or Federal law; or an satisfy the requirements stated in qualifying institution, as required by agreement between the creditor and § 1026.35(b)(2)(iii)(B) and (C). Section supervisory action, or pursuant to a such an agency. A qualified mortgage 1026.35(b)(2)(iii)(B) requires that, merger or acquisition. under § 1026.43(e)(5) that is sold, during the preceding calendar year, or, 7. Transfer three years after assigned, or otherwise transferred under if the application for the transaction was consummation. Under these circumstances retains its qualified received before April 1 of the current § 1026.43(e)(5)(ii)(A), if a qualified mortgage status regardless of how long calendar year, during either of the two mortgage under § 1026.43(e)(5) is sold, after consummation it is sold and preceding calendar years, the creditor assigned, or otherwise transferred three regardless of the size or other and its affiliates together extended no years or more after consummation, the characteristics of the transferee. Section more than 2,000 covered transactions, as loan retains its status as a qualified 1026.43(e)(5)(ii)(C) does not apply to defined by § 1026.43(b)(1), secured by mortgage under § 1026.43(e)(5) transfers done to comply with a first liens, that were sold, assigned, or following the transfer. The transferee generally applicable regulation with otherwise transferred to another person, need not be eligible to originate future effect designed to implement, or that were subject at the time of qualified mortgages under interpret, or prescribe law or policy in consummation to a commitment to be § 1026.43(e)(5). The loan will continue the absence of a specific order by or a acquired by another person. Section to be a qualified mortgage throughout its specific agreement with a governmental 1026.35(b)(2)(iii)(C) requires that, as of life, and the transferee, and any agency described in the preceding December 31st, or, if the subsequent transferees, may invoke the § 1026.43(e)(5)(ii)(C) directing the sale application for the transaction was presumption of compliance for qualified of one or more qualified mortgages received before April 1 of the current mortgages under § 1026.43(e)(1). under § 1026.43(e)(5) held by the 8. Transfer to another qualifying calendar year, as of either of the two creditor or one of the other creditor. Under § 1026.43(e)(5)(ii)(B), a preceding December 31sts, the creditor circumstances listed in qualified mortgage under § 1026.43(e)(5) and its affiliates that regularly extended, § 1026.43(e)(5)(ii)(C). For example, a may be sold, assigned, or otherwise during the applicable period, covered qualified mortgage under § 1026.43(e)(5) transferred at any time to another transactions, as defined by that is sold pursuant to a capital creditor that meets the requirements of § 1026.43(b)(1), secured by first liens, restoration plan under 12 U.S.C. 1831o together, had total assets of less than $2 § 1026.43(e)(5)(i)(D). That section would retain its status as a qualified billion, adjusted annually by the Bureau requires that a creditor together with all mortgage following the sale. However, if for inflation. its affiliates, extended no more than 5. Requirement to hold in portfolio. 2,000 first-lien covered transactions that the creditor simply chose to sell the Creditors generally must hold a loan in were sold, assigned, or otherwise same qualified mortgage as one way to portfolio to maintain the transaction’s transferred by the creditor or its comply with general regulatory capital status as a qualified mortgage under affiliates to another person, or that were requirements in the absence of § 1026.43(e)(5), subject to four subject at the time of consummation to supervisory action or agreement it exceptions. Unless one of these a commitment to be acquired by another would lose its status as a qualified exceptions applies, a loan is no longer person; and have, together with its mortgage following the sale unless it a qualified mortgage under affiliates that regularly extended qualifies under another definition of § 1026.43(e)(5) once legal title to the covered transactions secured by first qualified mortgage. debt obligation is sold, assigned, or liens, total assets less than $2 billion (as 10. Mergers and acquisitions. A otherwise transferred to another person. adjusted for inflation). These tests are qualified mortgage under § 1026.43(e)(5) Accordingly, unless one of the assessed based on transactions and retains its qualified mortgage status if a exceptions applies, the transferee could assets from the calendar year preceding creditor merges with, is acquired by, or not benefit from the presumption of the current calendar year or from either acquires another person regardless of compliance for qualified mortgages of the two calendar years preceding the whether the creditor or its successor is under § 1026.43(e)(1) unless the loan current calendar year if the application eligible to originate new qualified also met the requirements of another for the transaction was received before mortgages under § 1026.43(e)(5) after the qualified mortgage definition. April 1 of the current calendar year. A merger or acquisition. However, the 6. Application to subsequent qualified mortgage under § 1026.43(e)(5) creditor or its successor can originate transferees. The exceptions contained in transferred to a creditor that meets these new qualified mortgages under § 1026.43(e)(5)(ii) apply not only to an criteria would retain its qualified § 1026.43(e)(5) only if it complies with initial sale, assignment, or other transfer mortgage status even if it is transferred all of the requirements of § 1026.43(e)(5) by the originating creditor but to less than three years after after the merger or acquisition. For subsequent sales, assignments, and consummation. example, assume a creditor that other transfers as well. For example, 9. Supervisory sales. Section originates 250 covered transactions each assume Creditor A originates a qualified 1026.43(e)(5)(ii)(C) facilitates sales that year and originates qualified mortgages mortgage under § 1026.43(e)(5). Six are deemed necessary by supervisory under § 1026.43(e)(5) is acquired by a

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larger creditor that originates 10,000 transaction with balloon payment terms its accompanying commentary, except covered transactions each year. must provide for regular periodic for the calculation rules for a Following the acquisition, the small payments that do not result in an consumer’s total monthly debt creditor would no longer be able to increase of the principal balance, obligations (which is a component of originate § 1026.43(e)(5) qualified pursuant to § 1026.43(e)(2)(i)(A); must debt-to-income and residual income mortgages because, together with its have a loan term that does not exceed under § 1026.43(c)(7)). For purposes of affiliates, it would originate more than 30 years, pursuant to § 1026.43(e)(2)(ii); calculating the consumer’s total 500 covered transactions each year. and must have total points and fees that monthly debt obligations under However, the § 1026.43(e)(5) qualified do not exceed specified thresholds § 1026.43(f)(1)(iii), the creditor must mortgages originated by the small pursuant to § 1026.43(e)(2)(iii). calculate the monthly payment on the creditor before the acquisition would * * * * * covered transaction using the payment retain their qualified mortgage status. calculation rules in Paragraph 43(f)(1)(iii) * * * * * § 1026.43(f)(1)(iv)(A), together with all 1. Debt-to-income or residual income. mortgage-related obligations and Paragraph 43(f)(1)(i) A creditor must consider and verify the excluding the balloon payment. 1. Satisfaction of qualified mortgage consumer’s monthly debt-to-income * * * * * requirements. Under § 1026.43(f)(1)(i), ratio or residual income to meet the Dated: June 22, 2020. for a mortgage that provides for a requirements of § 1026.43(f)(1)(iii)(C). balloon payment to be a qualified To calculate the consumer’s monthly Laura Galban, mortgage, the mortgage must satisfy the debt-to-income or residual income for Federal Register Liaison, Bureau of Consumer requirements for a qualified mortgage in purposes of § 1026.43(f)(1)(iii)(C), the Financial Protection. paragraphs (e)(2)(i)(A), (e)(2)(ii), and creditor may rely on the definitions and [FR Doc. 2020–13739 Filed 7–9–20; 8:45 am] (e)(2)(iii). Therefore, a covered calculation rules in § 1026.43(c)(7) and BILLING CODE 4810–AM–P

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