In 2010, Congress signed into law a large piece of legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly known as the Dodd-Frank Act. Dodd-Frank amended the 1968 Truth in Lending Act (TILA), otherwise referred to as Regulation Z. In short, the Dodd-Frank Act reformed the financial system and added new government agencies to carry out these reforms with the goal of helping the country avoid another financial crisis like the one that occurred in 2008. Multiple provisions from Dodd-Frank took effect over several years, including the ATR/QM Rule. Some provisions and features, like Temporary GSE (Government-Sponsored Enterprise) QMs – which include loans sold through entities like Fannie Mae or Freddie Mac – have changed over time. The ATR/QM Rule was updated to make sure it protected consumers without overly limiting mortgage approvals. Many changes addressed the “GSE Patch,” which expired on October 1, 2022 and allowed borrowers who might not have otherwise qualified based on their DTI to move forward if their loans were eligible for purchase or guarantee by enterprises like Fannie Mae and Freddie Mac. The expiration of the patch could’ve created problems for the availability of mortgage credit, but the Consumer Financial Protection Bureau (CFPB) published amendments revising the ATR Rule to preempt these and other possible issues. Amended General QM RuleA Brief History Of The ATR/QM Rule
Updates To The ATR/QM Rule
The Amended General QM Rule completely replaced the DTI (debt-to-income) Limitation with a newer limitation based on price called the APR (annual percentage rate) Limitation. Compared to the 43% DTI limit, the APR rule caps qualifying loans at 2.25 percentage points above the average prime offer rate (APOR) for a comparable transaction.
In effect, this requires the creditor to consider the borrower’s present and reliable future income – outside of their real property – as well as debts. In connection to that, the CFPB believes that the DTI limit potentially reduced credit access for borrowers with a good credit standing, particularly low-to-moderate-income individuals.
Replacing the DTI limit with the APR limit also helped remove the need for a “patch” for GSEs like Fannie Mae and Freddie Mac.
Appendix Q
Originally, Appendix Q set the standards for considering a consumer’s monthly debts and income. But many argued Appendix Q was too strict and complicated, so it was removed. The new APR limit allows lenders to use the same standards that Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) use.
Seasoned QM Rule
The Seasoned QM Rule was added to protect non-QMs and higher-priced QMs from liability as long as they meet certain requirements and the lender that originated the loan holds the loan in its portfolio for 36 months. In other words, lenders who provide mortgages that meet core requirements are now typically not as legally vulnerable, regardless of whether their loan was originally a QM.
The rules for defining a Seasoned QM as a loan include:
- It being secured by a first lien
- It not being a high-cost mortgage
- It having a fixed interest rate
- The original creditor or purchaser holding the loan in its portfolio for at least 36 months
The CFPB chose 36 months based on the reasoning that the earlier the delinquency, the more likely it is that the consumer couldn’t pay the loan from the start. That is in contrast to the concept of defaulting as a result of a change in circ*mstance.
