Lenders and servicers are facing compliance challenges as the regulatory landscape continues to shift in the residential mortgage industry. On October 26, SitusAMC hosted its latest Compliance Corner webinar to discuss pressing issues, with featured guests Laura LaRaia, Chief Legal Officer & Chief Compliance Officer, Sprout Mortgage, and Jed Mayk, Partner, Hudson Cook, LLP. They were interviewed by Scott McNulla, SitusAMC Senior Director, Regulatory Compliance, and Sheila Meagher, Senior Vice President of ComplianceEase, a SitusAMC Company.
Recent decisions by the Consumer Financial Protecting Bureau (CFPB) have complicated lenders’ efforts to demonstrate compliance with the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, which requires a lender to verify a consumer’s ability to repay a mortgage before making the loan. Loans that meet the ATR/QM Rule’s requirements for QMs gain certain protections from liability. When the ATR/QM rule initially was instituted, loans purchased by Fannie Mae and Freddie Mac were not subject to all the QM requirements, specifically pertaining to adherence to Appendix Q and the 43 percent debt-to-income (DTI) limit. (Appendix Q contains standards for determining monthly debt and income for purposes of confirming whether a mortgage satisfies the 43 percent DTI limit for General QMs.) This variance to other QM requirements is referred to as the “Qualified mortgage defined – special rules”; the exception is more commonly known as the “QM Patch.”
Back in December 2020, the CFPB issued a new QM final rule with an effective date of March 1, 2021, but the rule permitted creditors to continue to originate using the prior QM rule until July 1, 2021. The new rule established an Average Prime Offer Rate (APOR) pricing methodology, giving lenders relief for loans with an APR that is not 225 basis points above the APOR, (with some higher thresholds applicable for lower loan balances, subordinate lien-covered transactions and certain manufactured homes loan amounts). The CFPB’s updated rule provided a creditor with a new means for a loan to meet General QM considerations if the creditor considers and verifies the consumer’s ability to repay and the APR “does not exceed the average prime offer rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set.” If the annual percentage rate exceeds APOR for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points, the ability to repay status would be deemed General QM, rebuttable presumption, the CFPB said. This standard effectively replaced the DTI limit of 43 percent and the requirement for the creditor to adhere to Appendix Q.
The CFPB decided to push off the mandatory effective date of the new rule from July 1, 2021, to October 1, 2022, saying it wanted to “ensure access to responsible, affordable mortgage credit, and preserve flexibility for consumers affected by the COVID-19 pandemic and its economic effects.” The QM Patch had originally been scheduled to expire in January 2021, but it had been extended to July 1, 2021; now it was pushed out by the CFPB until October 1, 2022, as well.
“The new rule and the extension have been a very complicated process,” Mayk said. “Obviously, the current leadership of the Bureau did not have any real say in the rule that was released back in late 2020 finalizing the price-based approach. So I think there are a number of options that could be considered by the Bureau if it wanted to make changes to this largely price-based-driven, general QM definition.”
LaRaia agreed. “I do think the acting director indicated that potentially they would make some changes in time,” she said. “But we're six months in and we haven't heard anything yet. It's a complicated dance step.”
The panel also discussed trends in fair lending and fair servicing, and how they might impact exams going forward from a regulatory perspective.
“I think this is an environment that is ripe for the Bureau and other regulators to be coming back and doing after-action assessments of how well servicers performed during the pandemic,” Mayk said. “And not just with respect to the various temporary federal and state COVID servicing rules for forbearances and foreclosure suspensions, but all the way back to the original set of Dodd Frank rulemakings in 2014. Because this is really the first time that at least certain segments of the housing market have encountered the kinds of economic conditions that these servicing rules were really put into place to address, coming out of the last financial crisis.”
COVID demanded a massive reset for servicers, who were required to extend forbearance to every borrower who requested it, with no proof of economic impact. From 2014 until the pandemic, servicers had to conform to certain milestones, guidelines, and steps along the way that required a lot of documentation and interaction before forbearance was granted, LaRaia noted. “Then you get to COVID, and it’s, ‘don't ask any questions, just accept (the request),’ she said. “That's a big switch and a challenge to switch those gears.”
To access the full recording of the Compliance Corner webinar, click here.