Summary: Advanced Notice of Proposed Rulemaking re: Qualified Mortgages under the Truth in Lending Act (Regulation Z)

Summary: Advanced Notice of Proposed Rulemaking re: Qualified Mortgages under the Truth in Lending Act (Regulation Z)

12 CFR Part 1026

Consumer Financial Protection Bureau

Prepared by the NASCUS Legislative & Regulatory Division

August 2019

The Consumer Financial Protection Bureau plans to allow the Temporary GSE Qualified Mortgage loan category to expire in January 2021 or after a short extension if necessary to facilitate a smooth and orderly transition.  The Bureau is considering whether to propose revisions to Regulation Z’s general qualified mortgage definition in light of that planned expiration and is issuing this ANPR to request information about possible revisions.

The ANPR can be found here. Comments on the ANPR are due to the Bureau no later than Sept. 16, 2019.   

Summary

Truth in Lending (TILA or Regulation Z) prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith determination (based on verified and documented information) that the consumer has a reasonable ability to repay the loan. TILA identifies a number of factors a creditor must consider when making a “reasonable and good faith assessment” of a consumer’s ability to repay the mortgage.  However, a creditor may not be certain whether its “Ability to Repay” (ATR) determination may be reasonable in a certain case and may risk possible liability based on that erroneous determination. TILA addresses this by defining a category of “qualified mortgages” where it is presumed that a creditor has met the ATR requirements.

The Bureau issued a final rule in January 2013 amending Regulation Z to implement the new TILA ATR provisions.  The final rule defines several categories of “qualified mortgages” including  Temporary GSE qualified mortgage loans, which are scheduled to expire no later than January 10, 2021.  The Bureau does not intend to make this category of qualified mortgages permanent. However, they are looking for feedback regarding the impact of the expiration of this QM category.

The Bureau is seeking feedback on the following:

  • Whether to propose to revise Regulation Z’s general qualified loan definition in light of the planned expiration of the temporary GSE QM loan provision?
  • Whether the definition should retain a direct measure of a consumer’s personal finances such as DTI ratio or residual income and how that measure should be structured?
  • Whether the definition should instead include an alternative method for assessing financial capacity or should be limited to the express statutory criteria?
  • Assuming that in addition to the statutory factors, the Bureau retains as part of the general QM loan definition a criterion that directly measures a consumer’s personal finances, should the Bureau continue to include only a DTI limit or should the Bureau replace or supplement the DTI limit with another method? If so, which method and why?
  • Assuming that the Bureau retains a DTI limit as part of the general QM loan definition, should the limit remain 43 percent? Should the Bureau increase/decrease the DTI limit to some other percentage? Should the Bureau grant QM status to loans with DTI ratios above a prescribed limit if certain compensating factors are present?
  • Assuming that the Bureau retains a criterion that directly measures a consumer’s personal finances—DTI ratio, residual income, or some other measure—the Bureau is considering what standards creditors should be permitted or required to use to calculate and verify debt and income.Currently, Appendix Q provides these standards. Should creditors be required to continue using Appendix Q to calculate and verify debt and income? Should the Bureau replace Appendix Q? If the Bureau retains Appendix Q, how should it be changed/supplemented?
  • If the Bureau does not retain Appendix Q or permits use of an alternative, what standard should the Bureau require or permit creditors to use to calculate or verify debt and income? Should the Bureau specify in Regulation Z an existing version of a widely used method of calculating and verifying debt and income that creditors would be required to use? Or, to provide flexibility to creditors, should the Bureau combine a general requirement to use a “reasonable method” with the option to use, as a safe harbor, a specified existing version of a widely used method for calculating/verifying debt and income?
  • Whether standards that do not directly measure a consumer’s personal finances are consistent with, and further TILA’s purpose of, ensuring that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans?
  • The Bureau requests comment on the advantages/disadvantages of such standards relative to standards that directly measure a consumer’s personal finances, including DTI ratio and residual income?
  • Assuming that the Bureau were to adopt standards that do not directly measure a consumer’s personal finances, should the Bureau retain the current line separating safe harbor and rebuttable presumption QMs or modify it, and if so, how? Should the Bureau further specify or clarify the grounds on which the presumption of compliance can be rebutted?
  • The Bureau requests comment, with supporting data, on how much time industry would need to change its practices following the issuance of a final rule with a new QM definition.