I am a bit confused by the new General QM rules and how it relates to higher priced loans. The new General QM allows for the APR/APOR spread up to 2.25 (generally). However, a loan is considered higher priced at 1.5 and then we would have the rebuttable presumption of compliance. So now that the General QM has the 2.25 cap, does that mean that if the spread is 2.25 or more, then we won't even have the rebuttable presumption of compliance and the loan is just not going to be a QM? We only qualify for the General QM, not small creditor.

Hi Comply or Else,

Exactly! The type of legal protection afforded to a QM (Safe Harbor vs Presumption of Compliance) relies on the loan's HPCT (Higher Priced Covered Transaction) status. If it is priced over the HPCT threshold, it will indeed be a HPCT. It will still be a QM, just with a rebuttable presumption of compliance rather than a safe harbor. This has always existed... a QM could have either protection, depending on the pricing.

Contrast that to a non-QM, which has no legal protection at all -- the creditor must prove the ability to repay if sued. That's what you'll have if you exceed the new General QM rate spread threshold - a non-QM. It will be a straight ATR loan, fully subject to 1026.43(c) rules. Keep an eye on the impact on balloon ATRs; HCML (High Cost Mortgage Loan aka HOEPA) rules of 1026.32; and HPML (Higher Priced Mortgage Loan) rules of 1026.35.

As a side note, a loan that IS priced within the new General QM rate spread will sometimes trigger HPML status, since the QM spread will be greater than the 1st lien HPML spread of 1.5%. That's ok, you can have a General QM HPML, you'll just have to meet the HPML requirements.

So to sum up, a loan can be priced to be a non-QM HCML HPML , or it can be priced low enough to still be a QM under the new rules, but it might end up being a QM HPCT HPML.

Thank you. That is the way I'm understanding it. I think I am still confused though with the 2.25. Why does that threshold exist if it can still be a QM, albeit a HPCT, regardless of the spread. I feel like I am missing a puzzle piece.

I don't think you're missing anything. The CFPB wanted to come up with something to replace the "inflexibility" of Appendix Q and the 43% debt ratio. It determined pricing takes into account a number of different underwriting considerations, enough to equate it with a reasonable ability to repay, in its eyes. The CFPB wanted to come up with a cutoff of the rate spread thresholds somewhere and, apparently, they were comfortable with the number of loans that would still qualify for QM status with the thresholds it came up with, based on different research:

...The Bureau concludes that a General QM eligibility threshold lower than 2.25 percentage points could unduly limit some consumers to non-QM or FHA loans with materially higher costs, or no responsible, affordable loan at all, given the current lack of a robust non-QM market.

So if we originate a first lien General QM (no interest only, etc.) and the APR/APOR spread is 3.00%, we still have a General QM, but it will be a HPCT with a rebuttable presumption of compliance, correct? It will also be an HPML to comply with.

I really appreciate the feedback from both of you!

Maybe a better way to ask this is...

If we originate a first lien General QM (no interest only, etc.) and the APR/APOR spread is 1.5 or more, we still have a General QM, but it will be a HPCT with a rebuttable presumption of compliance, correct? It may also be an HPML if it qualifies.

If the rate spread on a general QM is 1.5% or more (assuming not a "jumbo" loan) but less than 2.25% on a first-lien and other general QM requirements are met, it will be an HPML; an HPCT with a rebuttable presumption of compliance; as well as a QM.

Once the rate spread is 2.25% or more, it's going to depend on the loan amount.

Okay. But if it goes over 2.25 (or other threshold outlined in reg based on loan size/manufactured home), will it still be a QM with the HPCT rebuttable presumption of compliance? Or is the 2.25 the cap for it to remain a QM (with either safe harbor or rebuttable presumption of compliance)?

Sorry...this is where I am stuck!

Ahhh, got it. If you're dealing with a standard QM, it needs to meet the thresholds based on loan size/manufacturred home. If you exceed those, you don't have a standard QM and, as a result, no safe harbor or rebuttable presumption of compliance. In other words, QM standards need to be met first, for either the safe harbor or presumption of compliance to apply.

Yes, Diane nailed it. Once you exceed the standard QM threshold, you no longer have a QM, and you have no legal protection. (Assuming no other QM variety applies.)

To clarify, a loan's HPCT status only determines two things:

1) Determining the level of legal protection level (safe harbor or rebuttable presumption of compliance). This is only applicable if the loan is first a QM. If the loan is not a QM, this is completely moot; and
2) Determining how to treat a balloon payment for Ability to Repay calculations.

Thank you both for going through that exercise with me! I've got it now.

If you miss the QM limits but still complied with the ATR requirements otherwise, you can get sued by a borrower in trouble, but the longer the loan has been open and in good standing since consummation, the less credible the borrower's claim will be.

I am hoping to confirm how we are to calculate the APR/APOR spread for QM, HPML, and HMDA purposes.

HPML - use APR at time of closing
HMDA - use APR at time of closing
QM - use APR at time of closing or APR after max adjustment (within 5 years...) if an ARM or some other introductory rate

Is this a correct summary of how we should calculate each of these spreads?

Is anyone aware of any exceptions (or specific benefits) in reference to the new General QM Loan or Seasoned QM Loan rule for small creditors (<$2 billion)? I have read the Executive Summaries and scanned the final rules and nothing jumped out at me.

Thank you

Can I get your help in understanding the impact on jumbo loans. If a jumbo loan APR exceeds the APOR by more than 2.25%, but less than 2.50%, does the loan become a non-QM thus making safe harbor/rebuttal presumption a moot point?

The Revised General QM rules institute a new APR/APOR rate spread test:

For a first-lien covered transaction with a loan amount greater than or equal to $110,260, the APR exceeds APOR for a comparable transaction by less than 2.25 percentage points

I am not sure where your 2.5% is coming from?

I was thinking of jumbo loans 1026.35(a)(1)(ii).

You are confusing an HPML with a HPCT found in 1026.43(b)(4).

I'm not trying to live in the past, but prior to the creation of the new Seasoned QM, was there any type of seasoning to a non-QM loan that would make it a QM? I can't find that this was the case, but want to be sure. These new rules have a pretty big impact on our availability to make loans to strong borrowers that may not fit into the QM box. We just want to be sure we can't recapture older non-QM loans, similar to how we'll be able to with the new Seasoned QM. The only thing I can think of is that after 5 years we can remove the escrow requirement under 1026.35, but that isn't related to QM.

Thank you.

From page 86440 (page 39/54) in the final rule.

In light of these potential reliance interests, the Bureau has decided not to apply the final rule to loans in existence prior to the effective date. Thus, this final rule applies to covered transactions for which creditors receive an application on or after the effective date.

If you make non-QM loans, the longer a loan runs with timely payments, without modification or other accommodation, the stronger the creditor's case that it made a good-faith evaluation of the borrower's ability to repay should the matter ever come up in court.

Ok. Thanks, Dan and John.