[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Rules and Regulations]
[Pages 86402-86455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27571]



[[Page 86401]]

Vol. 85

Tuesday,

No. 249

December 29, 2020

Part IV





 Bureau of Consumer Financial Protection





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12 CFR Part 1026





Qualified Mortgage Definition Under the Truth in Lending Act 
(Regulation Z): Seasoned QM Loan Definition; Final Rule

  Federal Register / Vol. 85 , No. 249 / Tuesday, December 29, 2020 / 
Rules and Regulations  

[[Page 86402]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2020-0028]
RIN 3170-AA98


Qualified Mortgage Definition Under the Truth in Lending Act 
(Regulation Z): Seasoned QM Loan Definition

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretation.

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SUMMARY: With certain exceptions, Regulation Z requires creditors to 
make a reasonable, good faith determination of a consumer's ability to 
repay any residential mortgage loan, and loans that meet Regulation Z's 
requirements for ``qualified mortgages'' (QMs) obtain certain 
protections from liability. Regulation Z contains several categories of 
QMs, including the General QM category and a temporary category 
(Temporary GSE QMs) of loans that are eligible for purchase or 
guarantee by government-sponsored enterprises (GSEs) while they are 
operating under the conservatorship or receivership of the Federal 
Housing Finance Agency (FHFA). The Bureau of Consumer Financial 
Protection (Bureau) is issuing this final rule to create a new category 
of QMs (Seasoned QMs) for first-lien, fixed-rate covered transactions 
that have met certain performance requirements, are held in portfolio 
by the originating creditor or first purchaser for a 36-month period, 
comply with general restrictions on product features and points and 
fees, and meet certain underwriting requirements. The Bureau's primary 
objective with this final rule is to ensure access to responsible, 
affordable mortgage credit by adding a Seasoned QM definition to the 
existing QM definitions.

DATES: This final rule is effective on March 1, 2021.

FOR FURTHER INFORMATION CONTACT: Eliott C. Ponte or Ruth Van 
Veldhuizen, Counsels, or Joan Kayagil, Amanda Quester, or Jane Raso, 
Senior Counsels, Office of Regulations, at 202-435-7700. If you require 
this document in an alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule

    The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires 
a creditor to make a reasonable, good faith determination of a 
consumer's ability to repay a residential mortgage loan according to 
its terms. Loans that meet the ATR/QM Rule's requirements for QMs 
obtain certain protections from liability. The Bureau issued a proposal 
in August 2020 to create a new category of QMs, Seasoned QMs. The 
Bureau is now finalizing the proposal largely as proposed.\1\ The final 
rule defines Seasoned QMs as first-lien, fixed-rate covered 
transactions that have met certain performance requirements over a 
seasoning period of at least 36 months, are held in portfolio until the 
end of the seasoning period by the originating creditor or first 
purchaser, comply with general restrictions on product features and 
points and fees, and meet certain underwriting requirements.
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    \1\ As explained in more detail in part VI below, the final rule 
differs from the proposal in certain limited respects, including by 
adding a new exception to the portfolio requirement that allows 
loans to be transferred once during the seasoning period, excluding 
high-cost mortgages as defined in 12 CFR 1026.32(a), and applying 
the same consider and verify requirements that will apply to General 
QM loans.
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    The Bureau concludes that a Seasoned QM definition will complement 
existing QM definitions and help ensure access to responsible, 
affordable mortgage credit. One QM category defined in the ATR/QM Rule 
is the General QM category. General QMs must comply with the ATR/QM 
Rule's prohibitions on certain loan features, its points-and-fees 
limits, and its underwriting requirements. Under the definition for 
General QMs currently in effect, the ratio of the consumer's total 
monthly debt to total monthly income (DTI) must not exceed 43 percent. 
In a separate final rule released simultaneously with this final rule, 
the Bureau is amending the General QM loan definition to, among other 
things, replace the existing General QM loan definition that includes 
the 43 percent DTI limit with a price-based General QM loan definition 
(General QM Final Rule).
    A second, temporary category of QMs defined in the ATR/QM Rule is 
the Temporary GSE QM category, which consists of mortgages that (1) 
comply with the same loan-feature prohibitions and points-and-fees 
limits as General QMs and (2) are eligible to be purchased or 
guaranteed by the GSEs while under the conservatorship of the FHFA. The 
Temporary GSE QM loan definition was previously set to expire with 
respect to each GSE when that GSE ceases to operate under 
conservatorship or on January 10, 2021, whichever comes first. In a 
final rule issued on October 20, 2020 and published in the Federal 
Register on October 26, 2020, the Bureau extended the Temporary GSE QM 
loan definition until the earlier of the mandatory compliance date of 
final amendments to the General QM loan definition or the date the GSEs 
cease to operate under conservatorship or receivership (Extension Final 
Rule).\2\
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    \2\ 85 FR 67938 (Oct. 26, 2020).
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    The Bureau is issuing this final rule to create a new category of 
QMs because it seeks to encourage safe and responsible innovation in 
the mortgage origination market, including for certain loans that are 
not QMs or are rebuttable presumption QMs under the existing QM 
categories. The Bureau presumes compliance with the ability-to-repay 
(ATR) requirements if such loans season in the manner set forth in this 
final rule. Under this final rule, a covered transaction receives a 
safe harbor from ATR liability at the end of a seasoning period of at 
least 36 months as a Seasoned QM if it satisfies certain product 
restrictions, points-and-fees limits, and underwriting requirements, 
and it meets performance and portfolio requirements during the 
seasoning period. Specifically, a covered transaction has to meet the 
following product restrictions to be eligible to become a Seasoned QM:
    1. The loan is secured by a first lien;
    2. The loan has a fixed rate, with regular, substantially equal 
periodic payments that are fully amortizing and no balloon payments;
    3. The loan term does not exceed 30 years; and
    4. The loan is not a high-cost mortgage as defined in Sec.  
1026.32(a).
    In order to become a Seasoned QM, the loan's total points and fees 
also must not exceed specified limits.
    For a loan to be eligible to become a Seasoned QM, this final rule 
requires that the creditor consider the consumer's DTI ratio or 
residual income, income or assets other than the value of the dwelling, 
and debts and verify the consumer's income or assets other than the 
value of the dwelling and the consumer's debts, using the same consider 
and verify requirements established for General QMs in the General QM 
Final Rule.
    Under this final rule, a loan generally is eligible to season only 
if the creditor holds it in portfolio until the end of the seasoning 
period. There are several exceptions to this portfolio requirement that 
are similar to the exceptions to the Small Creditor QM portfolio 
requirement under the ATR/QM Rule. This final rule also includes an 
additional exception for a single transfer of a loan during the 
seasoning period. In the event of such a transfer, the final rule 
requires the purchaser to hold the

[[Page 86403]]

loan in portfolio after the transfer until the end of the seasoning 
period.
    In order to become a Seasoned QM, a loan must meet certain 
performance requirements at the end of the seasoning period. 
Specifically, seasoning is available only for covered transactions that 
have no more than two delinquencies of 30 or more days and no 
delinquencies of 60 or more days at the end of the seasoning period. 
Funds taken from escrow in connection with the covered transaction and 
funds paid on behalf of the consumer by the creditor, servicer, or 
assignee of the covered transaction (or any other person acting on 
their behalf) are not considered in assessing whether a periodic 
payment has been made or is delinquent for purposes of this final rule. 
Creditors can, however, generally accept deficient payments, within a 
payment tolerance of $50, on up to three occasions during the seasoning 
period without triggering a delinquency for purposes of this final 
rule.
    This final rule generally defines the seasoning period as a period 
of 36 months beginning on the date on which the first periodic payment 
is due after consummation. Failure to make full contractual payments 
does not disqualify a loan from eligibility to become a Seasoned QM if 
the consumer is in a temporary payment accommodation extended in 
connection with a disaster or pandemic-related national emergency, as 
long as certain conditions are met. However, time spent in such a 
temporary accommodation does not count towards the 36-month seasoning 
period, and the seasoning period can only resume after the temporary 
accommodation if any delinquency is cured either pursuant to the loan's 
original terms or through a qualifying change as defined in this final 
rule. This final rule defines a qualifying change as an agreement 
entered into during or after a temporary payment accommodation extended 
in connection with a disaster or pandemic-related national emergency 
that ends any preexisting delinquency and meets certain other 
conditions to ensure the loan remains affordable (such as a restriction 
on increasing the amount of interest charged over the full term of the 
loan as a result of the agreement).
    This final rule will take effect 60 days after publication in the 
Federal Register, which aligns with the effective date provided in the 
General QM Final Rule. For this final rule, the revised regulations 
apply to covered transactions for which creditors receive an 
application on or after the effective date.

II. Background

A. Dodd-Frank Act Amendments to the Truth in Lending Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) \3\ amended the Truth in Lending Act (TILA) \4\ to 
establish, among other things, ATR requirements in connection with the 
origination of most residential mortgage loans.\5\ The amendments were 
intended ``to assure that consumers are offered and receive residential 
mortgage loans on terms that reasonably reflect their ability to repay 
the loans and that are understandable and not unfair, deceptive or 
abusive.'' \6\ As amended, TILA 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.\7\
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    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ 15 U.S.C. 1601 et seq.
    \5\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-49; 15 
U.S.C. 1639c.
    \6\ 15 U.S.C. 1639b(a)(2).
    \7\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines 
``residential mortgage loan'' to mean, with some exceptions 
including open-end credit plans, ``any consumer credit transaction 
that is secured by a mortgage, deed of trust, or other equivalent 
consensual security interest on a dwelling or on residential real 
property that includes a dwelling.'' 15 U.S.C. 1602(dd)(5). TILA 
section 129C also exempts certain residential mortgage loans from 
the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting 
reverse mortgages and temporary or bridge loans with a term of 12 
months or less).
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    TILA identifies the factors a creditor must consider in making a 
reasonable and good faith assessment of a consumer's ability to repay. 
These factors are the consumer's credit history, current and expected 
income, current obligations, DTI ratio or residual income after paying 
non-mortgage debt and mortgage-related obligations, employment status, 
and other financial resources other than equity in the dwelling or real 
property that secures the repayment of the loan.\8\ A creditor, 
however, may not be certain whether its ATR determination is reasonable 
in a particular case.\9\
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    \8\ 15 U.S.C. 1639c(a)(3).
    \9\ A creditor that violates this ATR requirement may be subject 
to government enforcement and private actions. Generally, the 
statute of limitations for a private action for damages for a 
violation of the ATR requirement is three years from the date of the 
occurrence of the violation. 15 U.S.C. 1640(e). TILA also provides 
that if a creditor, an assignee, other holder, or their agent 
initiates a foreclosure action, a consumer may assert a violation by 
the creditor of the ATR requirement as a matter of defense by 
recoupment or set off without regard for the time limit on a private 
action for damages. 15 U.S.C. 1640(k).
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    TILA addresses this potential uncertainty by defining a category of 
loans--called QMs--for which a creditor ``may presume that the loan has 
met'' the ATR requirements.\10\ The statute generally defines a QM to 
mean any residential mortgage loan for which:
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    \10\ 15 U.S.C. 1639c(b)(1).
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     The loan does not have negative amortization, interest-
only payments, or balloon payments;
     The loan term does not exceed 30 years;
     The total points and fees generally do not exceed 3 
percent of the loan amount;
     The income and assets relied upon for repayment are 
verified and documented;
     The underwriting uses a monthly payment based on the 
maximum rate during the first five years, uses a payment schedule that 
fully amortizes the loan over the loan term, and takes into account all 
mortgage-related obligations; and
     The loan complies with any guidelines or regulations 
established by the Bureau relating to the ratio of total monthly debt 
to monthly income or alternative measures of ability to pay regular 
expenses after payment of total monthly debt.\11\
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    \11\ 15 U.S.C. 1639c(b)(2)(A).
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The ATR/QM Rule

    In January 2013, the Bureau issued a final rule amending Regulation 
Z to implement TILA's ATR requirements (January 2013 Final Rule).\12\ 
The January 2013 Final Rule became effective on January 10, 2014, and 
the Bureau has amended it several times since January 2013.\13\ This 
final rule refers to the January 2013 Final Rule and later amendments 
to it collectively as the ATR/QM Rule. The ATR/QM Rule implements the 
statutory ATR provisions discussed above and defines several categories 
of QMs.\14\
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    \12\ 78 FR 6408 (Jan. 30, 2013).
    \13\ See 78 FR 35429 (June 12, 2013); 78 FR 44686 (July 24, 
2013); 78 FR 60382 (Oct. 1, 2013); 79 FR 65300 (Nov. 3, 2014); 80 FR 
59944 (Oct. 2, 2015); 81 FR 16074 (Mar. 25, 2016); 85 FR 67938 (Oct. 
26, 2020).
    \14\ 12 CFR 1026.43(c), (e).
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1. General QMs
    One category of QMs defined by the ATR/QM Rule consists of General 
QMs. Under the definition for General QMs currently in effect, a loan 
is a General QM if:
     The loan does not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or 
points and fees that exceed specified limits; \15\
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    \15\ 12 CFR 1026.43(e)(2)(i) through (iii).
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     The creditor underwrites the loan based on a fully 
amortizing schedule

[[Page 86404]]

using the maximum rate permitted during the first five years; \16\
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    \16\ 12 CFR 1026.43(e)(2)(iv).
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     The creditor considers and verifies the consumer's income 
and debt obligations in accordance with appendix Q; \17\ and
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    \17\ 12 CFR 1026.43(e)(2)(v).
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     The consumer's DTI ratio is no more than 43 percent, 
determined in accordance with appendix Q.\18\
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    \18\ 12 CFR 1026.43(e)(2)(vi).
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    Appendix Q contains standards for calculating and verifying debt 
and income for purposes of determining whether a mortgage satisfies the 
43 percent DTI limit for General QMs. Appendix Q addresses how to 
determine a consumer's employment-related income (e.g., income from 
wages, commissions, and retirement plans); non-employment-related 
income (e.g., income from alimony and child support payments, 
investments, and property rentals); and liabilities, including 
recurring and contingent liabilities and projected obligations.\19\
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    \19\ 12 CFR 1026, appendix Q.
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    On June 22, 2020, the Bureau proposed amendments to the General QM 
loan definition, which would, among other things, replace the General 
QM loan definition's 43 percent DTI limit with a price-based approach 
and remove appendix Q.\20\ In addition to soliciting comment on the 
Bureau's proposed price-based approach, the Bureau requested comment on 
certain alternative approaches that would retain a DTI limit but would 
raise it above the current limit of 43 percent and provide a more 
flexible set of standards for verifying debt and income in place of 
appendix Q. Simultaneously with issuing this final rule, the Bureau is 
issuing the General QM Final Rule, which is discussed in part II.D 
below.
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    \20\ 85 FR 41716 (July 10, 2020).
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2. Temporary GSE QMs
    A second, temporary category of QMs defined by the ATR/QM Rule, 
Temporary GSE QMs, consists of mortgages that (1) comply with the ATR/
QM Rule's prohibitions on certain loan features and its limitations on 
points and fees; \21\ and (2) are eligible to be purchased or 
guaranteed by either GSE while under the conservatorship of the 
FHFA.\22\ Regulation Z does not prescribe a DTI limit for Temporary GSE 
QMs. Thus, a loan can qualify as a Temporary GSE QM even if the DTI 
ratio exceeds 43 percent, as long as the DTI ratio meets the applicable 
GSE's DTI requirements and other underwriting criteria, and the loan 
satisfies the other Temporary GSE QM requirements. In addition, income, 
debt, and DTI ratios for such loans generally are verified and 
calculated using GSE standards, rather than appendix Q. The January 
2013 Final Rule provided that the Temporary GSE QM loan definition--
also known as the GSE Patch--would expire with respect to each GSE when 
that GSE ceases to operate under conservatorship or on January 10, 
2021, whichever comes first.\23\ On June 22, 2020, the Bureau proposed 
to extend the Temporary GSE QM category until the effective date of 
final amendments to the General QM loan definition or the date the GSEs 
cease to operate under conservatorship or receivership, whichever comes 
first.\24\ In a final rule issued on October 20, 2020, the Bureau 
extended the Temporary GSE QM category until the earlier of the 
mandatory compliance date of final amendments to the General QM loan 
definition or the date the GSEs cease to operate under conservatorship 
or receivership.\25\
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    \21\ 12 CFR 1026.43(e)(2)(i) through (iii).
    \22\ 12 CFR 1026.43(e)(4).
    \23\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created 
several additional categories of QMs. The first additional category 
consisted of mortgages eligible to be insured or guaranteed (as 
applicable) by the U.S. Department of Housing and Urban Development, 
the U.S. Department of Veterans Affairs, the U.S. Department of 
Agriculture, and the Rural Housing Service. 12 CFR 
1026.43(e)(4)(ii)(B) through (E). This temporary category of QMs no 
longer exists because the relevant Federal agencies have since 
issued their own QM rules. See, e.g., 24 CFR 203.19. Other 
categories of QMs provide more flexible standards for certain loans 
originated by certain small creditors. 12 CFR 1026.43(e)(5), (f); 
cf. 12 CFR 1026.43(e)(6) (applicable only to covered transactions 
for which the application was received before April 1, 2016).
    \24\ 85 FR 41448 (July 10, 2020).
    \25\ 85 FR 67938 (Oct. 26, 2020).
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3. Small Creditor QMs
    In a May 2013 final rule, the Bureau amended the ATR/QM Rule to 
add, among other things, a new QM category--the Small Creditor QM--for 
covered transactions that are originated by creditors that meet certain 
size criteria and that satisfy certain other requirements.\26\ Those 
requirements include many that apply to General QMs, with some 
exceptions. Specifically, the threshold for determining whether Small 
Creditor QMs are higher-priced covered transactions, and thus qualify 
for the QM safe harbor or rebuttable presumption, is higher than the 
threshold for General QMs.\27\ Small Creditor QMs also are not subject 
to the General QM loan definition's 43 percent DTI limit, and the 
creditor is not required to use appendix Q to calculate debt and 
income.\28\ In addition, Small Creditor QMs must be held in portfolio 
for three years (a requirement that does not apply to General QMs).\29\ 
The Bureau made several amendments to the Small Creditor QM provisions 
in 2015.\30\ These included: Amending the small creditor definition to 
increase the number of loans a small creditor can originate each year 
to 2,000; exempting from the 2,000-loan limit any loans held in the 
creditor's portfolio; and revising the small creditor definition's 
asset threshold to include the assets of any of the creditor's 
affiliates.\31\
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    \26\ 78 FR 35430 (June 12, 2013).
    \27\ QMs are generally considered to be higher priced if they 
have an annual percentage rate (APR) that exceeds the applicable 
average prime offer rate (APOR) by at least 1.5 percentage points 
for first-lien loans and at least 3.5 percentage points for 
subordinate-lien loans. In contrast, Small Creditor QMs are only 
considered higher priced if the APR exceeds APOR by at least 3.5 
percentage points for either a first- or subordinate-lien loan. 12 
CFR 1026.43(b)(4). The same is true for another QM definition that 
permits certain creditors operating in rural or underserved areas to 
originate QMs with a balloon payment provided that the loans meet 
certain other criteria (Balloon Payment QM loans). QMs that are 
higher priced enjoy only a rebuttable presumption of compliance with 
the ATR requirements, whereas QMs that are not higher priced enjoy a 
safe harbor.
    \28\ 12 CFR 1026.43(e)(5)(i)(A).
    \29\ 12 CFR 1026.43(e)(5)(ii), (f)(2).
    \30\ 80 FR 59944 (Oct. 2, 2015).
    \31\ As with Small Creditor QMs, Balloon Payment QMs must be 
held in portfolio for three years. In addition, Balloon Payment QMs 
may not have negative-amortization or interest-only features and 
must comply with the points-and-fees limits that apply to other QM 
loans. Also, Balloon Payment QMs must carry a fixed interest rate, 
payments other than the balloon must fully amortize the loan over 30 
years or less, and the loan term must be at least five years. The 
creditor must also determine the consumer's ability to make periodic 
payments other than the balloon and verify income and assets. 12 CFR 
1026.43(f).
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    The Bureau created the Small Creditor QM category based on its 
determination that the characteristics of a small creditor--its small 
size, community-based focus, and commitment to relationship lending--
and the inherent incentives associated with portfolio lending together 
justify extending QM status to loans that do not meet all of the 
ordinary QM criteria.\32\ With respect to the role of portfolio 
lending, the Bureau stated that the discipline imposed when small 
creditors make loans that they will hold in portfolio is important to 
protect consumers' interests and to prevent evasion of the ATR 
requirements.\33\ The Bureau noted that by retaining mortgage loans in 
portfolio, creditors retain the risk of delinquency

[[Page 86405]]

or default on those loans, and as such the presence of portfolio 
lending within the small creditor market is an important influence on 
such creditors' underwriting practices.\34\
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    \32\ 78 FR 35430, 35485 (June 12, 2013) (``The Bureau believes 
that Sec.  1026.43(e)(5) will preserve consumers' access to credit 
and, because of the characteristics of small creditors and portfolio 
lending described above, the credit provided generally will be 
responsible and affordable.'').
    \33\ Id. at 35486.
    \34\ Id. at 35437.
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C. Economic Growth, Regulatory Relief, and Consumer Protection Act

    The Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA) was signed into law on May 24, 2018.\35\ Section 101 of the 
EGRRCPA amended TILA to provide protection from liability for insured 
depository institutions and insured credit unions with assets below $10 
billion with respect to certain ATR requirements regarding residential 
mortgage loans.\36\ Specifically, the protection from liability is 
available if a loan: (1) Is originated by and retained in portfolio by 
the institution, (2) complies with requirements regarding prepayment 
penalties and points and fees, and (3) does not have any negative 
amortization or interest-only features. Further, for the protection 
from liability to apply, the institution must consider and document the 
debt, income, and financial resources of the consumer. Section 101 of 
the EGRRCPA also provides that the protection from liability is not 
available in the event of legal transfer except for transfers: (1) To 
another person by reason of bankruptcy or failure of a covered 
institution; (2) to a covered institution that retains the loan in 
portfolio; (3) in the event of a merger or acquisition as long as the 
loan is still retained in portfolio by the person to whom the loan is 
sold, assigned, or transferred; or (4) to a wholly owned subsidiary of 
a covered institution, provided that, after the sale, assignment, or 
transfer, the loan is considered to be an asset of the covered 
institution for regulatory accounting purposes.
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    \35\ Public Law 115-174, 132 Stat. 1296 (2018).
    \36\ EGRRCPA section 101, 15 U.S.C. 1639c(b)(2)(F).
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D. General QM Final Rule

    Simultaneously with this final rule, the Bureau is issuing a final 
rule to amend the General QM loan definition because retaining the 
existing General QM loan definition with the 43 percent DTI limit after 
the Temporary GSE QM loan definition expires would significantly reduce 
the size of the QM market and could significantly reduce access to 
responsible, affordable credit.\37\ Readers should refer to the General 
QM Final Rule for a full discussion of the amendments and the Bureau's 
rationale for them.
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    \37\ 85 FR 41716 (July 10, 2020).
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    In the General QM Final Rule, the Bureau is establishing a price-
based General QM loan definition to replace the DTI-based approach. 
Under the General QM Final Rule, a loan meets the General QM loan 
definition in Sec.  1026.43(e)(2) only if the annual percentage rate 
(APR) exceeds the average prime offer rate (APOR) for a comparable 
transaction by less than 2.25 percentage points as of the date the 
interest rate is set. The General QM Final Rule provides higher 
thresholds for loans with smaller loan amounts, for certain 
manufactured housing loans, and for subordinate-lien transactions. It 
retains the existing product-feature and underwriting requirements and 
limits on points and fees. Although the General QM Final Rule removes 
the 43 percent DTI limit from the General QM loan definition, the 
General QM Final Rule requires that the creditor consider the 
consumer's monthly DTI ratio or residual income; current or reasonably 
expected income or assets other than the value of the dwelling 
(including any real property attached to the dwelling) that secures the 
loan; and debt obligations, alimony, and child support, and verify the 
consumer's current or reasonably expected income or assets other than 
the value of the dwelling (including any real property attached to the 
dwelling) that secures the loan and the consumer's current debt 
obligations, alimony, and child support. The General QM Final Rule 
removes appendix Q. To prevent uncertainty that may result from 
appendix Q's removal, the General QM Final Rule clarifies the consider 
and verify requirements. The General QM Final Rule preserves the 
current threshold separating safe harbor from rebuttable presumption 
QMs, under which a loan is a safe harbor QM if its APR does not exceed 
APOR for a comparable transaction by 1.5 percentage points or more as 
of the date the interest rate is set (or by 3.5 percentage points or 
more for subordinate-lien transactions).

E. Presumption of Compliance for Existing Categories of QMs Under the 
ATR/QM Rule

    In the January 2013 Final Rule, the Bureau considered whether QMs 
should receive a conclusive presumption (i.e., a safe harbor) or a 
rebuttable presumption of compliance with the ATR requirements.\38\ The 
statute does not specify whether the presumption of compliance means 
that the creditor receives a conclusive presumption or a rebuttable 
presumption of compliance with the ATR provisions. The Bureau noted 
that its analysis of the statutory construction and policy implications 
demonstrated that there are sound reasons for adopting either 
interpretation.\39\ The Bureau concluded that the statutory language is 
ambiguous and does not mandate either interpretation and that the 
presumptions should be tailored to promote the policy goals of the 
statute.\40\ The Bureau ultimately interpreted the statute to provide 
for a rebuttable presumption of compliance with the ATR requirements 
but used its adjustment authority to establish a conclusive presumption 
of compliance for loans that are not ``higher priced.'' \41\
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    \38\ 78 FR 6408, 6511 (Jan. 30, 2013).
    \39\ Id. at 6507.
    \40\ Id. at 6511.
    \41\ Id. at 6514.
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    Under the ATR/QM Rule, a creditor that makes a QM is protected from 
liability presumptively or conclusively, depending on whether the loan 
is ``higher priced.'' The ATR/QM Rule generally defines a ``higher-
priced'' loan to mean a first-lien mortgage with an APR that exceeded 
APOR for a comparable transaction as of the date the interest rate was 
set by 1.5 or more percentage points; or a subordinate-lien mortgage 
with an APR that exceeded APOR for a comparable transaction as of the 
date the interest rate was set by 3.5 or more percentage points.\42\ A 
creditor that makes a QM that is not ``higher priced'' is entitled to a 
conclusive presumption that it has complied with the ATR/QM Rule--i.e., 
the creditor receives a safe harbor from liability.\43\ A creditor that 
makes a loan that meets the standards for a QM but is ``higher priced'' 
is entitled to a rebuttable presumption that it has complied with the 
ATR/QM Rule.\44\
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    \42\ 12 CFR 1026.43(b)(4).
    \43\ 12 CFR 1026.43(e)(1)(i).
    \44\ 12 CFR 1026.43(e)(1)(ii).
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F. The Bureau's Assessment of the ATR/QM Rule

    Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess 
each of its significant rules and orders and to publish a report of 
each assessment within five years of the effective date of the rule or 
order.\45\ In June 2017, the Bureau published a request for information 
in connection with its assessment of the ATR/QM Rule (Assessment 
RFI).\46\ These comments are summarized in general terms in part III 
below.
---------------------------------------------------------------------------

    \45\ 12 U.S.C. 5512(d).
    \46\ 82 FR 25246 (June 1, 2017).
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    In January 2019, the Bureau published its ATR/QM Rule Assessment 
Report

[[Page 86406]]

(Assessment Report).\47\ The Assessment Report included findings about 
the effects of the ATR/QM Rule on the mortgage market generally, as 
well as specific findings about Temporary GSE QM originations.
---------------------------------------------------------------------------

    \47\ Bureau of Consumer Fin. Prot., Ability to Repay and 
Qualified Mortgage Assessment Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf (Assessment Report).
---------------------------------------------------------------------------

    The Assessment Report found that the ATR/QM Rule did not eliminate 
access to credit for consumers with DTI ratios above 43 percent who 
qualify for loans eligible for purchase or guarantee by either of the 
GSEs, that is, Temporary GSE QMs.\48\ On the other hand, based on 
application-level data obtained from nine large creditors, the 
Assessment Report found that the ATR/QM Rule eliminated between 63 and 
70 percent of home purchase loans with DTI ratios above 43 percent that 
were not Temporary GSE QMs.\49\
---------------------------------------------------------------------------

    \48\ See, e.g., id. at 10, 194-96.
    \49\ See, e.g., id. at 10-11, 117, 131-47.
---------------------------------------------------------------------------

    One main finding about Temporary GSE QMs was that such loans 
continued to represent ``a large and persistent'' share of originations 
in the conforming segment of the mortgage market, and a robust and 
sizable market to support non-QM lending has not emerged.\50\ As 
discussed, the GSEs' share of the conventional, conforming purchase-
mortgage market was 69 percent in 2013 before the ATR/QM Rule took 
effect, and the Assessment Report found a small increase in that share 
since the ATR/QM Rule's effective date, reaching 71 percent in 
2017.\51\
---------------------------------------------------------------------------

    \50\ Id. at 188, 198.
    \51\ Id. at 191.
---------------------------------------------------------------------------

    The Assessment Report discussed several possible reasons for the 
continued prevalence of Temporary GSE QM originations, including the 
structure of the secondary market.\52\ If creditors adhere to the GSEs' 
guidelines, they gain access to a robust, highly liquid secondary 
market.\53\ In contrast, while private-label securitizations have grown 
somewhat in recent years, they are still a fraction of their pre-crisis 
levels.\54\ There were less than $20 billion in new origination 
private-label securities (PLS) issuances in 2017, compared with $1 
trillion in 2005,\55\ and only 21 percent of new origination PLS 
issuances in 2017 were non-QM issuances.\56\ To the extent that 
private-label securitizations have occurred since the ATR/QM Rule took 
effect in 2014, the majority of new origination PLS issuances have 
consisted of prime jumbo loans made to consumers with strong credit 
characteristics, and these securities include a small share of non-QM 
loans.\57\ The Assessment Report noted that the Temporary GSE QM loan 
definition may be inhibiting the growth of the non-QM market.\58\ 
However, the Assessment Report also noted that it is possible that this 
market might not exist even with a narrower Temporary GSE QM loan 
definition, if consumers were unwilling to pay the premium charged to 
cover the potential litigation risk associated with non-QM loans (which 
do not have a presumption of compliance with the ATR requirements) or 
if creditors were unwilling or lack the funding to make the loans as a 
result of the potential litigation risk.\59\
---------------------------------------------------------------------------

    \52\ Id. at 196.
    \53\ Id.
    \54\ Id.
    \55\ Id.
    \56\ Id. at 197.
    \57\ Id. at 196.
    \58\ Id. at 205.
    \59\ Id.
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G. Effects of the COVID-19 Pandemic on Mortgage Markets

    The COVID-19 pandemic has had a significant effect on the U.S. 
economy. In the early months of the pandemic, economic activity 
contracted, millions of workers became unemployed, and mortgage markets 
were affected. In recent months, the unemployment rate has declined, 
and there has been a significant rebound in mortgage origination 
activity, buoyed by historically low interest rates and by an 
increasingly large share of government and GSE-backed loans. However, 
origination activity outside the government and GSE-backed origination 
channels has declined, and mortgage-credit availability for many 
consumers--including those who would be dependent on the non-QM market 
for financing--remains tight relative to pre-pandemic levels. While 
nearly all major non-QM creditors ceased making loans in March and 
April 2020, the market has begun to recover and many non-QM creditors--
which largely depend on the ability to sell loans in the secondary 
market to fund new loans--have begun to resume originations, albeit 
with tighter underwriting requirements.\60\
---------------------------------------------------------------------------

    \60\ Brandon Ivey, Expanded Credit Lending Inches Up in Third 
Quarter, Inside Mortg. Fin. (Nov. 25, 2020), https://www.insidemortgagefinance.com/articles/219861-expanded-credit-lending-ticks-up-in-3q-amid-slow-recovery (on file).
---------------------------------------------------------------------------

    In March 2020, Congress passed and the President signed into law 
the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).\61\ 
The CARES Act provides additional protections for borrowers with 
federally backed mortgages, such as those whose mortgages are purchased 
or securitized by a GSE or insured or guaranteed by the Federal Housing 
Administration (FHA), U.S. Department of Veterans Affairs (VA), or U.S. 
Department of Agriculture (USDA). The CARES Act mandated a 60-day 
foreclosure moratorium for such mortgages, which has since been 
extended by the agencies until the end of 2020 or January 31, 2021 in 
the case of the GSEs.\62\ The CARES Act also allows borrowers with 
federally backed mortgages to request up to 180 days of forbearance due 
to a COVID-19-related financial hardship, with an option to extend the 
forbearance period for an additional 180 days. While forbearance rates 
remain elevated at 5.54 percent for the week ending November 22, 2020, 
they have decreased since reaching their high of 8.55 percent on June 
7, 2020.\63\
---------------------------------------------------------------------------

    \61\ Public Law 116-136, 134 Stat. 281 (2020) (includes loans 
backed by the U.S. Department of Housing and Urban Development, the 
U.S. Department of Agriculture, the U.S. Department of Veterans 
Affairs, Fannie Mae, and Freddie Mac).
    \62\ See, e.g., Fed. Hous. Fin. Agency, FHFA Extends Foreclosure 
and REO Eviction Moratoriums (Dec. 2, 2020), https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-Foreclosure-and-REO-Eviction-Moratoriums-12022020.aspx; Press Release, U.S. Dep't of Hous. & 
Urban Dev., FHA Extends Foreclosure And Eviction Moratorium For 
Homeowners Through Year End (Aug. 27, 2020), https://www.hud.gov/press/press_releases_media_advisories/HUD_No_20_134; Veterans 
Benefits Admin., Extended Foreclosure Moratorium for Borrowers 
Affected by COVID-19 (Aug. 24, 2020), https://www.benefits.va.gov/HOMELOANS/documents/circulars/26-20-30.pdf; Rural Dev., U.S. Dep't 
of Agric., Extension of Foreclosure and Eviction Moratorium for 
Single Family Housing Direct Loans (Aug. 28, 2020), https://content.govdelivery.com/accounts/USDARD/bulletins/29c3a9e.
    \63\ Press Release, Mortg. Bankers Ass'n, Share of Mortgage 
Loans in Forbearance Increases to 5.54% (Dec. 1, 2020), https://www.mba.org/2020-press-releases/december/share-of-mortgage-loans-in-forbearance-increases-to-554-percent.
---------------------------------------------------------------------------

    For further discussion of the effect of the COVID-19 pandemic on 
mortgage origination and servicing markets, see part II.D of the 
General QM Final Rule.

III. Summary of the Rulemaking Process

    The Bureau has solicited and received substantial public and 
stakeholder input on issues related to the ATR/QM Rule generally and 
the substance of this final rule. In addition to the Bureau's 
discussions with and communications from industry stakeholders, 
consumer advocates, other Federal agencies,\64\ and members of 
Congress, the Bureau issued requests for information (RFIs) in 2017

[[Page 86407]]

and 2018, and in July 2019, it issued an advance notice of proposed 
rulemaking regarding the ATR/QM Rule (ANPR).\65\ The input from these 
RFIs and from the ANPR is briefly summarized in the General QM Final 
Rule and Extension Final Rule and below. The Bureau has also received 
substantial additional input through three ATR/QM rulemakings this 
year, as discussed below and in the General QM Final Rule and Extension 
Final Rule.
---------------------------------------------------------------------------

    \64\ The Bureau has consulted with agencies including the FHFA, 
the Board of Governors of the Federal Reserve System, the Federal 
Housing Administration, the Federal Deposit Insurance Corporation 
(FDIC), the Office of the Comptroller of the Currency (OCC), the 
Federal Trade Commission, the National Credit Union Administration, 
and the U.S. Department of the Treasury.
    \65\ 84 FR 37155 (July 31, 2019).
---------------------------------------------------------------------------

A. The Requests for Information

    In June 2017, the Bureau published the Assessment RFI to gather 
information for its assessment of the ATR/QM Rule.\66\ In response to 
the Assessment RFI, the Bureau received approximately 480 comments from 
creditors, industry groups, consumer advocate groups, and 
individuals.\67\ The comments addressed a variety of topics, including 
the General QM loan definition and the 43 percent DTI limit; perceived 
problems with, and potential changes and alternatives to, appendix Q; 
and how the Bureau should address the expiration of the Temporary GSE 
QM loan definition. The comments expressed a range of ideas for 
addressing the expiration of the Temporary GSE QM loan definition. Some 
commenters recommended making the definition permanent or extending it 
for various periods of time. Other comments stated that the Temporary 
GSE QM loan definition should be eliminated or permitted to expire.
---------------------------------------------------------------------------

    \66\ 82 FR 25246 (June 1, 2017).
    \67\ See Assessment Report, supra note 47, appendix B 
(summarizing comments received in response to the Assessment RFI).
---------------------------------------------------------------------------

    Beginning in January 2018, the Bureau issued a general call for 
evidence seeking comment on its enforcement, supervision, rulemaking, 
market monitoring, and financial education activities.\68\ As part of 
the call for evidence, the Bureau published RFIs relating to, among 
other things, the Bureau's rulemaking process,\69\ the Bureau's adopted 
regulations and new rulemaking authorities,\70\ and the Bureau's 
inherited regulations and inherited rulemaking authorities.\71\ In 
response to the call for evidence, the Bureau received comments on the 
ATR/QM Rule from stakeholders, including consumer advocate groups and 
industry groups. The comments addressed a variety of topics, including 
the General QM loan definition, appendix Q, and the Temporary GSE QM 
loan definition. The comments also raised concerns about, among other 
things, the risks of allowing the Temporary GSE QM loan definition to 
expire without any changes to the General QM loan definition or 
appendix Q. The concerns raised in these comments were similar to those 
raised in response to the Assessment RFI.
---------------------------------------------------------------------------

    \68\ See Bureau of Consumer Fin. Prot., Call for Evidence, 
https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/archive-closed/call-for-evidence (last updated 
Apr. 17, 2018).
    \69\ 83 FR 10437 (Mar. 9, 2018).
    \70\ 83 FR 12286 (Mar. 21, 2018).
    \71\ 83 FR 12881 (Mar. 26, 2018).
---------------------------------------------------------------------------

The Advance Notice of Proposed Rulemaking

    As noted above, on July 25, 2019, the Bureau issued an ANPR.\72\ 
The ANPR stated the Bureau's tentative plans to allow the Temporary GSE 
QM loan definition to expire in January 2021 or after a short 
extension, if necessary, to facilitate a smooth and orderly transition 
away from the Temporary GSE QM loan definition. The Bureau also stated 
that it was considering whether to propose revisions to the General QM 
loan definition in light of the potential expiration of the Temporary 
GSE QM loan definition and requested comments on several topics related 
to the General QM loan definition, including: Whether and how the 
Bureau should revise the DTI limit in the General QM loan definition; 
whether the Bureau should supplement or replace the DTI limit with 
another method for directly measuring a consumer's personal finances; 
whether the Bureau should revise appendix Q or replace it with other 
standards for calculating and verifying a consumer's debt and income; 
and whether, instead of a DTI limit, the Bureau should adopt standards 
that do not directly measure a consumer's personal finances.\73\ Of 
relevance to this final rule, the ANPR noted that some stakeholders had 
suggested that the Bureau amend the ATR/QM Rule so that a performing 
loan, whether or not it qualified as a QM at consummation, would 
convert to, or season into, a QM if it performed for some period of 
time. The Bureau also requested comment on how much time industry would 
need to change its practices in response to any revisions the Bureau 
makes to the General QM loan definition.
---------------------------------------------------------------------------

    \72\ 84 FR 37155 (July 31, 2019).
    \73\ Id. at 37160-62.
---------------------------------------------------------------------------

    The Bureau received 85 comments on the ANPR from businesses in the 
mortgage industry (including creditors and their trade associations), 
consumer advocate groups, elected officials, individuals, and research 
centers. The General QM Proposal contains an overview of these 
comments.\74\ Of the 85 comments received, approximately 20 comments 
discussed whether the Bureau should permit a mortgage that was not a QM 
at consummation to season into a QM on the ground that a loan's 
performance over an extended period should be considered sufficient or 
conclusive evidence that the creditor adequately assessed a consumer's 
ability to repay at consummation. The discussion below provides a more 
detailed overview of comment letters that supported a seasoning 
approach to QM status and those that opposed such an approach.
---------------------------------------------------------------------------

    \74\ 85 FR 41716 (July 10, 2020).
---------------------------------------------------------------------------

1. Comments Supporting Seasoning
    As discussed in the General QM Proposal, commenters from the 
mortgage industry and its trade associations, as well as several 
research centers, recommended that a mortgage that is originated as a 
non-QM or rebuttable presumption QM should be eligible to season into a 
QM safe harbor loan if a consumer makes timely payments for a 
predetermined length of time. According to these commenters, if a loan 
defaults after performing for some period of time, such as three or 
five years, it is reasonable to conclude that the default was not 
caused by the creditor's failure to reasonably determine the consumer 
had the ability to repay at the time of consummation. Rather, these 
commenters maintained that defaults in those cases are more likely to 
be caused by unexpected life events or other factors, such as general 
economic trends, rather than a creditor's poor underwriting or failure 
to make an ATR determination at consummation.
    A few commenters pointed to the GSEs' representation and warranty 
framework.\75\ Under this framework, after a loan meets certain payment 
requirements, the creditor obtains relief from the enforcement of 
representations and warranties it must make to a GSE regarding its 
underwriting. These commenters indicated that a creditor's legal 
exposure to the ATR requirements should sunset in a similar way. In 
addition, several commenters noted that the 2019 U.S. Department of the 
Treasury Housing Reform Plan report also suggested consideration of a 
seasoning approach to QM safe harbor loan status.\76\ A few commenters

[[Page 86408]]

asserted that allowing mortgages to season into QMs is consistent with 
comment 43(c)(1)-1.ii.A.1 in the current ATR/QM Rule.\77\ A comment 
letter jointly submitted by two research centers suggested that a 
seasoning approach to portfolio-held mortgages build on the EGRRCPA's 
portfolio loan QM category.
---------------------------------------------------------------------------

    \75\ The GSEs' representation and warranty framework is 
discussed in greater detail in part V below.
    \76\ U.S. Dep't of the Treasury, Housing Reform Plan at 38 
(Sept. 2019), https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf?mod=article_inline.
    \77\ Comment 43(c)(1)-1.ii.A (``The following may be evidence 
that a creditor's ability-to-repay determination was reasonable and 
in good faith: 1. The consumer demonstrated actual ability to repay 
the loan by making timely payments, without modification or 
accommodation, for a significant period of time after consummation 
or, for an adjustable-rate, interest-only, or negative-amortization 
mortgage, for a significant period of time after recast . . . .'').
---------------------------------------------------------------------------

    Further, a number of commenters stated that a seasoning approach to 
QM status would benefit the mortgage market. Among other things, they 
stated that it could reduce compliance burden. Additionally, commenters 
in support of seasoning suggested that seasoning could improve investor 
confidence by addressing the issue of assignee liability and litigation 
risk with non-QM loans and rebuttable presumption QM loans. These 
commenters stated that this, in turn, could enhance capital liquidity 
in the market, which could expand access to credit. Several commenters 
suggested that a seasoning rule should apply to loans even if they were 
originated before the adoption of the rule.
    Commenters supporting a seasoning approach offered differing views 
on the appropriate length of the seasoning period, varying from as 
brief as 12 months following consummation to as long as five years 
following consummation. Some opposed any restrictions on loan features, 
while others supported some restrictions, such as limiting the 
seasoning approach to mortgages that follow the statutory QM product 
prohibitions or to fixed-rate mortgage products. Several commenters 
supporting a seasoning approach also supported or did not oppose a 
requirement for creditors to hold loans in portfolio until the 
conclusion of the seasoning period. For example, some research center 
commenters noted that keeping loans in portfolio demonstrates 
creditors' acceptance of the default risk associated with the loan.
    Some research center commenters suggested graduated or step 
approaches. Under one such approach, for example, a non-QM loan would 
first have to season into a rebuttable presumption QM loan and then 
either stay in that category or be allowed to season into a QM safe 
harbor loan if it meets certain conditions. Commenters supporting 
seasoning generally acknowledged that delinquencies during the 
seasoning period should disqualify a loan from seasoning into a QM, but 
most did not offer specific suggestions regarding what it means for a 
loan to be performing. A comment letter from a research center 
suggested the Bureau use the Mortgage Bankers Association's method for 
determining timely payments.
    Several commenters supporting a seasoning approach also addressed 
the possibility of creditors engaging in gaming to minimize defaults 
during the seasoning period. Two commenters asserted that the Bureau 
could require consumers to use their own funds to make monthly payments 
but did not provide any suggestions on how to determine whether the 
funds used are the consumer's funds rather than the funds of another. A 
research center commenter suggested that a competitive guarantor market 
such as the one the U.S. Department of the Treasury envisions in the 
long term would serve as a check on gaming by creditors. The same 
commenter also argued that it would be hard for creditors to game a 
seasoning approach because they would not be able to easily time 
harmful mortgages to go delinquent only after a given period following 
consummation.
Comments Opposing Seasoning
    Two coalitions of consumer advocate groups submitted separate 
comment letters opposing a seasoning approach to QM status. The General 
QM Proposal described some of their concerns, including the following: 
(1) A period of successful repayment is insufficient to presume 
conclusively that the creditor reasonably determined ability to repay 
at consummation; (2) creditors would engage in gaming to minimize 
defaults during the seasoning period; and (3) seasoning would 
inappropriately prevent consumers from raising lack of ability to repay 
as a defense to foreclosure. In addition, the consumer advocate groups 
asserted that, depending on the length of the seasoning period, 
seasoning could inappropriately prevent consumers from bringing 
affirmative claims against creditors for allegedly violating the ATR 
requirements. One coalition of consumer advocate groups stated that in 
providing a three-year statute of limitations for consumers to bring 
such claims, Congress had indicated that the seasoning period could not 
be less than three years for rebuttable presumption or non-QM loans. 
Another coalition of consumer advocate groups stated that the three-
year statute of limitations may be extended if equitable tolling 
applies and, as such, consumers may pursue affirmative claims for 
alleged violations of the ATR requirements beyond the three-year 
period. Both coalitions of consumer advocate groups stated that non-QM 
loans and QM loans that only receive a rebuttable presumption of 
compliance with the ATR requirements at consummation should not be 
allowed to season into QM safe harbor loans because the right a 
consumer has to raise the lack of ability to repay as a defense to 
foreclosure is not subject to the three-year statute of limitations.
    The consumer advocate groups also stated that certain types of 
mortgages should never be allowed to season into QMs, including 
adjustable-rate mortgages (ARMs) and mortgages with product features 
that disqualify them from being a QM loan currently (e.g., interest-
only and negative-amortization mortgages). With respect to adjustable-
rate mortgages, consumer advocate groups expressed concern stating that 
just because a consumer can remain current during an initial teaser-
rate period or during a low-interest rate environment does not mean 
that the consumer has the ability to repay the loan when the interest 
rate rises. One coalition of consumer advocate groups noted that 
consumers may not have the ability to repay interest-only or negative-
amortization mortgages after the teaser rate payment period ends and 
stated that payment shock from higher future payments is inherent in 
the structure of these mortgage products.
    In contrast to industry commenters who argued that allowing loans 
to season into QMs would promote access to credit and improve market 
liquidity, consumer advocate groups suggested that providing a QM 
seasoning definition would not benefit market liquidity and could hurt 
underserved communities. They asserted that a seasoning rule would 
prevent creditors from originating loans with certainty about who 
ultimately bears the credit and liquidity risk and what their 
litigation risk will eventually be. They further asserted that the 
uncertainty created by such risks has a greater, negative impact on 
independent mortgage bankers without large balance sheets that are an 
important source of credit for underserved communities. One coalition 
of consumer advocate groups also asserted that a heightened risk of 
put-backs with mortgages not originated as QMs would create significant 
liquidity and credit risks for creditors, particularly non-depository 
creditors important to fully serving the market.
    Lastly, the consumer advocate groups challenged the Bureau's 
authority to amend the definition of QM to provide seasoning as a 
pathway to QM status, asserting that seasoning would facilitate,

[[Page 86409]]

not prevent, circumvention or evasion of the statute's ATR 
requirements. They stated that consumers can resort to extraordinary 
measures to stay current on mortgage payments to stay in their homes, 
such as foregoing spending on necessities; drawing down retirement 
accounts; borrowing money from family and friends; going without food, 
medicine, or utilities; or taking on other types of debt (such as 
credit card debt). These commenters stated that, as a result, even 
mortgages that were not affordable at consummation can perform for a 
long period of time. The consumer advocate groups further cited 
examples to show that mortgages can default due to unforeseen events. 
One coalition of consumer advocate groups noted that the timing of 
default often reflects broader economic conditions, given the 
procyclical nature of the mortgage market.

Extension Proposal, General QM Proposal, and Ensuing Final Rules

    On June 22, 2020, the Bureau released the Extension Proposal, which 
would have extended the Temporary GSE QM loan definition to expire on 
the effective date of final amendments to the General QM loan 
definition or the date the GSEs cease to operate under conservatorship, 
whichever comes first.\78\ On the same date, the Bureau separately 
released the General QM Proposal, which proposed amendments to the 
General QM loan definition.\79\ In a final rule issued on October 20, 
2020, the Bureau extended the Temporary GSE QM category until the 
earlier of the mandatory compliance date of final amendments to the 
General QM loan definition or the date the GSEs cease to operate under 
conservatorship.\80\ In another final rule issued simultaneously with 
this final rule, the Bureau is amending the General QM loan definition. 
The General QM Final Rule is discussed in part II.D above.
---------------------------------------------------------------------------

    \78\ 85 FR 41448 (July 10, 2020).
    \79\ 85 FR 41716 (July 10, 2020).
    \80\ 85 FR 67938 (Oct. 26, 2020).
---------------------------------------------------------------------------

Seasoned QM Proposal

    On August 18, 2020, the Bureau issued a proposed rule to create a 
new category of QMs, Seasoned QMs, for first-lien, fixed-rate covered 
transactions that have met certain performance requirements over a 36-
month seasoning period, are held in portfolio until the end of the 
seasoning period, comply with general restrictions on product features 
and points and fees, and meet certain underwriting requirements 
(Seasoned QM Proposal). The Seasoned QM Proposal was published in the 
Federal Register on August 28, 2020, with a 30-day comment period.\81\ 
The comment period was later extended briefly and ended on October 1, 
2020.\82\
---------------------------------------------------------------------------

    \81\ 85 FR 53568 (Aug. 28, 2020).
    \82\ 85 FR 60096 (Sept. 24, 2020).
---------------------------------------------------------------------------

    Consumer advocate groups and an organization representing State 
regulators further asked the Bureau to provide an extension to the 
comment period of up to an additional 60 days. These commenters cited 
the complexity of the rule, the concurrent QM rulemakings, and the 
difficulties presented by the COVID-19 pandemic in support of their 
request. The Bureau concludes that the comment period (including the 
brief extension) provided interested stakeholders with sufficient 
opportunity to comment on the proposal. The Bureau has previously 
issued other rules of similar complexity pursuant to a 30-day comment 
period and concludes that the data and analysis supporting the proposal 
were relatively straightforward for commenters to understand and 
comment on.
    In response to the Seasoned QM Proposal, the Bureau received around 
40 comments from consumer advocate groups, industry participants, 
industry trade associations, other nonprofit organizations, a member of 
Congress, and others. As discussed in more detail below, the Bureau has 
considered these comments in adopting this final rule.\83\
---------------------------------------------------------------------------

    \83\ The Bureau also received a number of comments in response 
to the General QM Proposal that relate to the Seasoned QM Proposal. 
The Bureau has considered those comments as well in adopting this 
final rule.
---------------------------------------------------------------------------

IV. Legal Authority

    The Bureau is issuing this final rule pursuant to its authority 
under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act 
transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the Board of Governors of the Federal Reserve System (Board). 
The Dodd-Frank Act defines the term ``consumer financial protection 
function'' to include ``all authority to prescribe rules or issue 
orders or guidelines pursuant to any Federal consumer financial law, 
including performing appropriate functions to promulgate and review 
such rules, orders, and guidelines.'' \84\ Title X of the Dodd-Frank 
Act (including section 1061), along with TILA and certain subtitles and 
provisions of title XIV of the Dodd-Frank Act, are Federal consumer 
financial laws.\85\
---------------------------------------------------------------------------

    \84\ 12 U.S.C. 5581(a)(1)(A).
    \85\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act), Dodd-Frank Act section 1002(12)(O), 12 U.S.C. 
5481(12)(O) (defining ``enumerated consumer laws'' to include TILA).
---------------------------------------------------------------------------

A. TILA

    TILA section 105(a). Section 105(a) of TILA directs the Bureau to 
prescribe regulations to carry out the purposes of TILA and states that 
such regulations may contain such additional requirements, 
classifications, differentiations, or other provisions and may further 
provide for such adjustments and exceptions for all or any class of 
transactions that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith.\86\ A purpose of TILA 
is ``to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various credit terms 
available to him and avoid the uninformed use of credit.'' \87\ 
Additionally, a purpose of TILA sections 129B and 129C is to assure 
that consumers are offered and receive residential mortgage loans on 
terms that reasonably reflect their ability to repay the loans and that 
are understandable and not unfair, deceptive, or abusive.\88\ As 
discussed in the section-by-section analysis below, the Bureau is 
issuing certain provisions of this final rule pursuant to its 
rulemaking, adjustment, and exception authority under TILA section 
105(a).
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 1604(a).
    \87\ 15 U.S.C. 1601(a).
    \88\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------

    TILA section 129C(b)(2)(A)(vi). TILA section 129C(b)(2)(A)(vi) 
provides the Bureau with authority to establish guidelines or 
regulations relating to ratios of total monthly debt to monthly income 
or alternative measures of ability to pay regular expenses after 
payment of total monthly debt, taking into account the income levels of 
the borrower and such other factors as the Bureau may determine 
relevant and consistent with the purposes described in TILA section 
129C(b)(3)(B)(i).\89\ As discussed in the section-by-section analysis 
below, the Bureau is issuing certain provisions of this final rule 
pursuant to its authority under TILA section 129C(b)(2)(A)(vi).
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 1639c(b)(2)(A).
---------------------------------------------------------------------------

    TILA section 129C(b)(3)(A) and (B)(i). TILA section 
129C(b)(3)(B)(i) authorizes the Bureau to prescribe regulations that 
revise, add to, or subtract from the criteria that define a QM upon a 
finding that such regulations are necessary or proper to ensure that 
responsible, affordable mortgage credit remains

[[Page 86410]]

available to consumers in a manner consistent with the purposes of TILA 
section 129C; or are necessary and appropriate to effectuate the 
purposes of TILA sections 129B and 129C, to prevent circumvention or 
evasion thereof, or to facilitate compliance with such sections.\90\ In 
addition, TILA section 129C(b)(3)(A) directs the Bureau to prescribe 
regulations to carry out the purposes of TILA section 129C(b).\91\ As 
discussed in the section-by-section analysis below, the Bureau is 
issuing certain provisions of this final rule pursuant to its authority 
under TILA section 129C(b)(3)(B)(i).
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 1639c(b)(3)(B)(i).
    \91\ 15 U.S.C. 1639c(b)(3)(A).
---------------------------------------------------------------------------

B. Dodd-Frank Act

    Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules to enable the Bureau 
to administer and carry out the purposes and objectives of the Federal 
consumer financial laws, and to prevent evasions thereof.\92\ TILA and 
title X of the Dodd-Frank Act are Federal consumer financial laws. 
Accordingly, in this final rule, the Bureau is exercising its authority 
under Dodd-Frank Act section 1022(b) to prescribe rules that carry out 
the purposes and objectives of TILA and title X and prevent evasion of 
those laws.
---------------------------------------------------------------------------

    \92\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------

V. Why the Bureau Is Issuing This Final Rule

    The Bureau is issuing this final rule to create an alternative 
pathway to a QM safe harbor to encourage safe and responsible 
innovation in the mortgage origination market, including for loans that 
may be originated as non-QM loans but meet certain underwriting 
conditions, product restrictions, and performance requirements. The 
Bureau is establishing this alternative definition because it concludes 
that many loans made to creditworthy consumers that do not fall within 
the existing QM loan definitions at consummation may be able to 
demonstrate through sustained loan performance compliance with the ATR 
requirements.

A. Considerations Related to Access to Responsible, Affordable Credit 
Discussed in the Proposal

    As described in the proposal, a primary objective of the Seasoned 
QM alternative pathway to a QM safe harbor is to ensure the 
availability of responsible and affordable credit. Incentivizing the 
origination of non-QM loans that otherwise may not be made (or may be 
made at a significantly higher price) due to perceived litigation or 
other risks, even if a creditor has confidence that it can originate 
the loan in compliance with the ATR requirements, furthers the 
objective of ensuring the availability of responsible and affordable 
credit. The Bureau is concerned that, as discussed in the Assessment 
Report, the perceived risks associated with non-QM status at 
consummation may inhibit creditors' willingness to make such loans and 
thus could limit access to responsible, affordable credit for certain 
creditworthy consumers.\93\ As noted in the proposal, an analysis of 
rejected applications in the Assessment Report suggested that the 
January 2013 Final Rule's impact on access to credit among particular 
categories of consumers did not correlate with traditional indicators 
of creditworthiness, such as credit score, income, and down payment 
amount. Moreover, the Assessment Report also found that there was 
significant variation in the extent to which creditors have tightened 
credit for non-GSE eligible high DTI loans following the publication of 
the January 2013 Final Rule. This variation and its persistence in the 
years following the ATR/QM Rule's issuance suggest that creditors have 
not developed a common approach to measuring and predicting risk of 
noncompliance with the ATR/QM Rule, as they have accomplished for other 
types of risks, such as prepayment and default.\94\ For instance, 
cross-creditor differences in both the level and the change in approval 
rates of high DTI applications are much larger than, for example, 
differences in approval rates by FICO category.\95\ The lack of 
uniformity is likely due in part to the difficulties associated with 
measuring and quantifying the litigation and compliance risk associated 
with originating non-QM loans. Thus, the Assessment Report concluded 
that some of the observed effect of the ATR/QM Rule on access to credit 
was likely driven by creditors' interest in avoiding litigation or 
other risks associated with non-QM status, rather than by rejections of 
consumers who were unlikely to repay the loan based on traditional 
indicators of creditworthiness.\96\
---------------------------------------------------------------------------

    \93\ See Assessment Report, supra note 47, at 11, 118, 150.
    \94\ Id. at 118, 147, 150.
    \95\ Id. at 147.
    \96\ Id. at 118, 150.
---------------------------------------------------------------------------

    While the proposal acknowledged that the Assessment Report analyzed 
the impact of the January 2013 Final Rule and its 43 percent DTI limit 
on access to credit, the proposal noted that specific findings related 
to the uncertainty of compliance and litigation risk for non-QM loans--
and the resulting impact on consumers' access to credit--remain 
relevant regardless of any amendments to the General QM loan 
definition.\97\ Indeed, while the Bureau anticipated that its General 
QM Proposal to replace the current 43 percent DTI limit with a price-
based approach would increase access to responsible and affordable 
mortgage credit among consumers with DTI ratios above 43 percent, the 
proposal expressed concern that compliance uncertainty and litigation 
risk would still persist for the remaining population of loans 
originated as non-QM loans at consummation. Furthermore, the proposal 
noted that the composition of the non-QM market has continued to grow 
and evolve since the period covered by the Assessment Report. In recent 
years, the share of non-QM securitizations comprised of loans with a 
DTI in excess of 43 percent has fallen, while loans based on 
alternative income documentation has grown to become the largest non-QM 
subsector, comprising approximately 50 percent of securitized pools in 
the first half of 2019.\98\ As a result, the Bureau preliminarily 
concluded in the proposal that providing a QM safe harbor to non-QM 
loans that have demonstrated sustained and timely mortgage payment 
histories could have a meaningful impact on improving access to credit 
for creditworthy consumers whose loans fall outside the other QM 
definitions.
---------------------------------------------------------------------------

    \97\ See 85 FR 41716 (July 10, 2020).
    \98\ S&P Global Ratings, Non-QM's Meteoric Rise is Leading the 
Private-Label RMBS Comeback (Sept. 20, 2019), https://www.spglobal.com/ratings/en/research/articles/190920-non-qm-s-meteoric-rise-is-leading-the-private-label-rmbs-comeback-11159125. 
Alternative income documentation includes alternative sources of 
income verification (e.g., bank statements), which vary from 
traditional income underwriting forms/documents such as W-2 forms, 
paystubs, and tax returns. The variation is due to the use of non-
traditional sources of documentation, such as for self-employed 
consumers.
---------------------------------------------------------------------------

    The Bureau proposed to adopt a Seasoned QM definition primarily to 
encourage creditors to originate more responsible, affordable loans 
that are not QMs at consummation, and to ensure that responsible, 
affordable credit is not lost because of legal uncertainty in non-QM 
status. The Bureau also stated that a Seasoned QM definition could 
provide incentives for making additional rebuttable presumption QM 
loans. As explained in the proposal, while the GSEs purchase rebuttable 
presumption QM loans, and nearly half of manufactured housing 
originations are rebuttable presumption QM loans, large

[[Page 86411]]

banks tend to originate only safe harbor QM loans. A Seasoned QM 
definition may provide an additional incentive for large banks to 
originate rebuttable presumption QM loans that may not be eligible for 
sale to the GSEs and therefore may not otherwise have been made.
    The proposal explained that based on feedback from external 
stakeholders, the Bureau expected that a Seasoned QM definition may 
encourage creditors to originate more responsible, affordable loans 
that are not QMs at consummation, and ensure that creditors do not 
decide not to make responsible, affordable loans because of legal 
uncertainty in non-QM status. Comments on the ANPR suggested that 
allowing performing loans to season into QM status would provide 
creditors with clarity and certainty by ensuring that creditors would 
not have to litigate their ATR compliance long after consummation when 
an extensive record of on-time payments demonstrates that compliance 
and when default is more likely due to a change in the consumer's 
circumstances. Not only would allowing performing loans to season into 
QM status clarify a creditor's litigation risk, but external feedback 
suggested this could help provide certainty for secondary market 
participants that might otherwise be unable or unwilling to accept the 
litigation risk associated with assignee liability for either 
rebuttable presumption QM or non-QM loans.
    The proposal acknowledged that creditors may be uncertain about 
whether certain loans fall within the existing QM definitions. For 
example, the U.S. Department of Housing and Urban Development (HUD), 
the VA, and the USDA have each promulgated QM definitions pursuant to 
their authority under TILA section 129C(b)(3)(B)(ii), and they have 
largely set their QM criteria based on eligibility criteria they apply 
in their respective mortgage insurance or guarantee programs. The 
proposal noted that a creditor may be uncertain about whether a State 
court would interpret and apply those criteria to a particular loan in 
a consumer's TILA section 130(k) \99\ foreclosure defense, if the 
loan's QM status were ever challenged, in the same way the agency would 
in administering its mortgage insurance or guarantee program. As 
discussed in the proposal, to the extent that there is ambiguity as to 
whether a given loan is eligible for a QM safe harbor through other QM 
definitions, a Seasoned QM definition will provide additional legal 
certainty by providing an alternative basis for a conclusive 
presumption of ATR compliance after the required seasoning period.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 1640(k).
---------------------------------------------------------------------------

    As discussed in the proposal, to the extent that additional legal 
certainty provided by a Seasoned QM definition makes creditors more 
comfortable extending these types of loans in the future, such an 
effect would not only promote continued access to responsible and 
affordable credit, but could result in increased access to such credit. 
While the rationale in the proposal was primarily focused on the non-
agency and non-QM markets, the proposal noted that the agency (i.e., 
GSE and government-insured) mortgage markets in the wake of the 2008 
recession can serve as a useful illustration of the chilling effect 
legal risk and compliance uncertainty can have on origination markets. 
Access to responsible mortgage credit remained tight for years after 
the crisis, even in the agency mortgage market in which creditors 
typically do not bear the credit risk of default.\100\ While there is 
no doubt that the size and scale of the 2008 crisis impacted creditors' 
willingness to take on credit risk, creditors also imposed additional, 
more stringent borrowing requirements due to their concerns that they 
could be forced to repurchase loans as a result of subsequent 
assertions of non-compliance. This occurred even though creditors 
believed the loans complied with FHA requirements for mortgage 
insurance and GSE standards for sale into the secondary markets without 
the more stringent borrowing requirements. Following GSE and FHA 
reforms, the proposal noted that access to responsible mortgage credit 
for GSE and government-insured loans has begun to rebound, with some of 
the biggest banks considering a return to FHA lending.\101\ Similarly, 
the Bureau noted in the proposal that creditors may originate loans 
they believe to be QMs at origination, but to the extent any lingering 
ambiguity remains, the added compliance certainty provided by the 
Seasoned QM definition could further incentivize creditors to originate 
these loans at scale.
---------------------------------------------------------------------------

    \100\ Jim Parrot & Mark Zandi, Opening the Credit Box, Moody's 
Analytics & the Urban Inst. (Sept. 30, 2013), https://www.urban.org/sites/default/files/publication/24001/412910-Opening-the-Credit-Box.PDF. As an illustration of the tight underwriting requirements, 
in 2013, the average credit score in the agency market was over 750. 
This is 50 points higher than the average credit score across all 
loans at the time, and 50 points higher than the average score among 
those who purchased homes a decade prior, implying that mortgage 
origination markets may have over-corrected relative to the economic 
fundamentals at the time.
    \101\ JPMorgan mulls return to FHA-backed mortgages after era of 
fines, Am. Banker (Feb. 5, 2020), https://www.americanbanker.com/articles/jpmorgan-mulls-return-to-fha-backed-mortgages-after-era-of-fines.
---------------------------------------------------------------------------

    In addition, the Bureau preliminarily concluded in the proposal 
that, along with a possible increase in non-QM originations, a Seasoned 
QM definition might also encourage meaningful innovation and lending to 
broader groups of creditworthy consumers, especially those with less 
traditional credit profiles. As described in the proposal, the Bureau 
anticipates that innovations in technology and diversification of the 
overall economy will lead to changes in the composition of the job 
market and labor force, and the Bureau intends for the ATR/QM Rule to 
remain sufficiently flexible to accommodate and encourage developments 
in mortgage underwriting to reflect these changes. New technology 
allows creditors to assess financial information that may not be 
readily apparent through a traditional credit report, such as a 
consumer's ability to consistently make on-time rent payments. The use 
of new tools could broaden homeownership to consumers who may have 
lacked credit histories with major credit reporting bureaus and so may 
have been less likely to obtain mortgages at an affordable price or 
obtain a mortgage at all. Additionally, technology platforms have led 
to rapid growth in the ``gig economy,'' through which workers earn 
income by providing services such as ride-sharing and home delivery and 
through the ability to earn income on assets such as a home. Some 
workers participate in the gig economy for their sole source of income, 
while others may do so to supplement their income from more traditional 
employment. Creditors' methods of assessing consumers' ability to repay 
mortgages evolve to accommodate these changes, but creditors may be 
left with some uncertainty as to whether these methods constitute, or 
can be part of, a reasonable determination of a consumer's ability to 
repay under the ATR/QM Rule. Accordingly, the Bureau preliminarily 
concluded in the proposal that allowing an alternative pathway to a QM 
safe harbor may encourage creditors to lend to consumers with less 
traditional credit profiles at an affordable price based on an 
individualized determination of a consumer's ability to repay.
    The proposal acknowledged that the extent to which a Seasoned QM 
definition may increase access to credit would be a function of the 
size of the eligible loan population that could benefit: The more loans 
that would be

[[Page 86412]]

eligible to become Seasoned QMs, the more loans might be made that 
would not otherwise be made. In determining the length of time that is 
the appropriate seasoning period, the Bureau considered the rate at 
which loans terminate, to assess the potential population of loans that 
would be eligible to benefit from a Seasoned QM definition and thus 
potentially affect access to credit. Based on the data and analysis 
presented in part VII of the proposal, the Bureau preliminarily 
concluded that the majority of eligible non-QM and rebuttable 
presumption mortgage loans would remain active and thus be eligible to 
benefit from the seasoning period, across the economic cycle.

B. Considerations Related to Ability To Repay Discussed in the Proposal

    The Bureau proposed to introduce an alternative pathway to a QM 
safe harbor for a new category of Seasoned QMs because it preliminarily 
concluded that, when coupled with certain other factors, successful 
loan performance over a number of years appears to indicate with 
sufficient certainty creditor compliance with the ATR requirements at 
consummation.
    The proposal first noted that the current ATR/QM Rule provides that 
loan performance can be a factor in evaluating a creditor's ATR 
determination. Specifically, it provides that evidence that a 
creditor's ATR determination was reasonable and in good faith may 
include the fact that the consumer demonstrated actual ability to repay 
the loan by making timely payments, without modification or 
accommodation, for a significant period of time after 
consummation.\102\ It explains further that the longer a consumer 
successfully makes timely payments after consummation or recast,\103\ 
the less likely it is that the creditor's determination of ability to 
repay was unreasonable or not in good faith. The current ATR/QM Rule 
also distinguishes between a failure to repay that can be evidence that 
a consumer lacked the ability to repay at loan consummation, versus a 
failure to repay due to a subsequent change in the consumer's 
circumstances that the creditor could not have reasonably anticipated 
at consummation. Specifically, it states that a change in the 
consumer's circumstances after consummation (for example, a significant 
reduction in income due to a job loss or a significant obligation 
arising from a major medical expense) that cannot be reasonably 
anticipated from the consumer's application or the records used to 
determine repayment ability is not relevant to determining a creditor's 
compliance with the ATR/QM Rule.\104\ Thus, the existing regulatory 
framework supports the relevance of loan performance, particularly 
during the initial period following consummation, in evaluating a 
creditor's ATR determination at consummation.
---------------------------------------------------------------------------

    \102\ Comment 43(c)(1)-1.ii.A.1.
    \103\ Section 1026.43(b)(11) provides a definition of recast.
    \104\ Comment 43(c)(1)-2.
---------------------------------------------------------------------------

    Second, the proposal explained that an approach that takes loan 
performance into consideration in evaluating ATR compliance is 
consistent with the Bureau's prior analyses of repayment ability. 
Because the affordability of a given mortgage will vary from consumer 
to consumer based upon a range of factors, there is no single 
recognized metric, or set of metrics, that can directly measure whether 
the terms of mortgage loans are within consumers' ability to 
repay.\105\ The Bureau's Assessment Report concluded that early 
borrower distress was an appropriate proxy for the lack of the 
consumer's ability to repay at consummation across a wide pool of 
loans. Likewise, in the General QM Proposal and General QM Final Rule, 
the Bureau focused on an analysis of delinquency rates in the first few 
years to evaluate whether a loan's price, as measured by the spread of 
APR over APOR (herein referred to as the loan's rate spread), may be an 
appropriate measure of whether a loan should be presumed to comply with 
the ATR provisions. The incorporation of loan performance requirements 
in a Seasoned QM definition in turn reflects the Bureau's view that 
across a wide pool of loans, early distress supports an inference that 
consumers lacked the ability to repay at consummation.
---------------------------------------------------------------------------

    \105\ Assessment Report, supra note 47, at 83.
---------------------------------------------------------------------------

    As discussed in the proposal, in general, the earlier a delinquency 
occurs, the more likely it is due to a lack of ability to repay at 
consummation than a change in circumstances after consummation that the 
creditor could not have reasonably anticipated from the consumer's 
application or the records used to determine repayment ability. 
However, there is neither an exact period of time after which all 
delinquencies can be attributed to a lack of ability to repay at 
consummation, nor an exact period after which no delinquencies can be 
attributed to a lack of ability to repay at consummation. The Bureau 
proposed a seasoning period of 36 months based on a range of policy 
considerations, rather than any singular measure of delinquency, as 
discussed in the section-by-section analysis of Sec.  
1026.43(e)(7)(iv)(C). The Bureau preliminarily decided in the proposal 
to grant a safe harbor to these loans because 36 months of loan 
performance, combined with the product restrictions and underwriting 
requirements as defined in the proposal, appeared to indicate with 
sufficient certainty creditor compliance with the ATR requirements at 
consummation. The Bureau acknowledged that some meaningful percentage 
of non-QM loans may end up delinquent in later years. But, given the 
increasing likelihood that intervening events meaningfully contributed 
to such delinquencies, the proposal noted the Bureau does not view 
delinquency at that point in the lifecycle of a loan product as 
undermining the presumption of creditor compliance with the ATR 
requirements at consummation.
    The proposal also explained that the current practices of market 
participants with respect to remedies for deficiencies in underwriting 
practices also support the Bureau's adoption of a seasoning period to 
evaluate a creditor's ATR determination. Each GSE generally provides 
creditors relief from its enforcement with respect to representations 
and warranties a creditor must make to the GSE regarding its 
underwriting of a loan. The GSEs generally provide creditors that 
relief after the first 36 monthly payments if the consumer had no more 
than two 30-day delinquencies.\106\ Similarly, the master policies of 
mortgage insurers generally provide that the mortgage insurer will not 
issue a rescission with respect to certain representations and 
warranties the originating lender made if the consumer had no more than 
two 30-day delinquencies in the 36 months following the consumer's 
first payment, among other requirements.\107\ These practices, which 
extend to a significant portion of covered transactions, suggest that 
the GSEs and mortgage insurers have concluded, based on their 
experience, that after 36 months of loan performance, a default should 
not be attributed to underwriting, but rather a change in the 
consumer's circumstances that the creditor could not have reasonably 
anticipated from the consumer's application or the records.
---------------------------------------------------------------------------

    \106\ Fed. Hous. Fin. Agency, Representation and Warranty 
Framework, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Representation-and-Warranty-Framework.aspx (last visited Nov. 30, 
2020).
    \107\ Fannie Mae, Amended and Restated GSE Rescission Relief 
Principles for Implementation of Master Policy Requirement #28 
(Rescission Relief/Incontestability) (Sept. 10, 2018), https://singlefamily.fanniemae.com/media/16331/display.

---------------------------------------------------------------------------

[[Page 86413]]

    Based on these considerations, the Bureau preliminarily concluded 
in the proposal that a consumer's timely payments for 36 months, in 
combination with compliance with the product restrictions and 
underwriting and portfolio requirements in the proposal, indicate that 
the consumer had the ability to repay the loan at consummation, such 
that granting of safe harbor QM status to the loan is warranted subject 
to certain limitations. As discussed in the proposal, the Bureau 
focused on loans that would be eligible to be Seasoned QMs and that 
have an interest rate spread in excess of 150 basis points, and 
therefore would be outside the safe harbor threshold in the General QM 
Proposal and General QM Final Rule. These non-QMs and rebuttable 
presumption QMs are the population whose ATR compliance presumption 
status would be affected by becoming Seasoned QMs. The proposal noted 
that two-thirds (66 percent) of loans that experience a disqualifying 
event (i.e., an event that would prevent a loan from becoming a 
Seasoned QM under the proposed criteria described in the section-by-
section analysis of Sec.  1026.43(e)(7)) do so within 36 months, and 
the rate at which loans disqualify diminishes beyond 36 months. The 
proposal explained that this may suggest that a failure to repay that 
occurs more than three years after consummation can generally be 
attributed to causes other than the consumer's ability to repay at loan 
consummation, such as a subsequent job loss or other change in the 
consumer's circumstances that could not reasonably be anticipated from 
the records used to determine repayment ability. Furthermore, while the 
proposal acknowledged that it is possible that a consumer could 
continue making on-time payments for some period of time despite 
lacking the ability to repay, such as by forgoing payments on other 
obligations, the Bureau noted that it believes it is unlikely that a 
consumer could continue doing so for more than three years following 
consummation, especially in the absence of circumstances that would be 
disqualifying under the proposal (such as a 60-day delinquency), as 
explained below in part VI.
    Notwithstanding this evidence and these considerations, the 
proposal acknowledged that a consumer might lack an ability to repay at 
loan consummation and yet still make timely payments for three years. 
For example, a consumer could at consummation lack the ability to make 
a fully amortizing mortgage payment but manage to make interest-only 
payments in the first three years. The proposal noted that the prospect 
that at consummation a consumer may lack the ability to repay a loan 
yet still make timely payments for three years, as well as the 
potential benefits that a Seasoned QM definition might offer in terms 
of fostering access to responsible, affordable mortgage credit, would 
tend to vary depending on the loan characteristics. To address this, 
the proposal limited the Seasoned QM definition to first-lien, fixed-
rate covered transactions that are held in the originating creditor's 
portfolio (with specified exceptions), satisfy the existing product-
feature requirements and limits on points and fees under the General QM 
loan definition, and meet the underwriting requirements applicable to 
Small Creditor QMs.

C. Comments in Support of a Seasoned QM Definition

    Numerous industry commenters supported the Bureau's proposal to 
create a pathway to a QM safe harbor for loans that demonstrate a 
satisfactory performance history, subject to certain product feature 
restrictions and underwriting requirements. Commenters who supported 
the Seasoned QM definition generally supported the Bureau's rationale 
for the proposal, which is described in parts V.A and V.B above. With 
respect to encouraging responsible innovation and expansion in the non-
QM market, commenters supporting the proposal generally agreed that a 
Seasoned QM definition would provide an important incentive for 
industry to originate loans that are considered non-QMs at origination, 
while appropriately balancing access to credit with meaningful consumer 
protections. With respect to ability to repay, these commenters also 
generally agreed that a borrower's demonstrated ability to make three 
years of mortgage payments indicates that the creditor made a 
reasonable, good faith determination of the borrower's ability to repay 
at consummation and should therefore warrant a conclusive presumption 
of compliance.
    Individual financial institutions as well as industry trade 
associations argued that a Seasoned QM definition would increase access 
to credit without undermining protections for consumers. Some of these 
commenters stated that a Seasoned QM definition would reduce non-QM 
litigation exposure and reward responsible underwriting. While industry 
commenters offered varying assessments of the extent to which this 
reduction in compliance uncertainty and litigation exposure would 
increase access to credit, many industry commenters indicated that the 
proposal would encourage origination of more loans that may be 
considered non-QM or rebuttable presumption QM at origination without 
weakening the rule's ability to protect consumers from unaffordable 
mortgage loans.
    Several industry commenters agreed that the proposal would provide 
a meaningful incentive for creditors to use innovative underwriting 
techniques to increase access to credit and reduce the costs of credit 
for the substantial share of the broader population who may lack 
traditional credit profiles or income sources and therefore struggle to 
qualify for mortgage credit through GSE and government mortgage 
programs. These commenters also noted that because these borrowers are 
more likely to fall outside the GSE and government underwriting 
guidelines, their loans are also more likely to be higher priced and 
therefore fall outside of the Bureau's price-based thresholds for 
determining General QM status. An industry trade association noted that 
market data show creditors have a lower willingness to originate non-QM 
and rebuttable presumption QM loans. Examples provided by commenters of 
these credit-worthy borrowers who have limited credit history include 
younger consumers without a long credit history, elderly borrowers who 
have paid down their debts and pay their expenses with cash, and other 
consumers who may have used more informal means of borrowing in the 
past. Examples provided of borrowers with non-traditional income 
include those with income sources that are not reported on W-2 forms 
who have difficulty qualifying under standard underwriting guidelines 
due to variable amount and timing of their income, such as ``gig 
economy'' workers, seasonal employees, and self-employed borrowers.
    Three industry commenters supported the proposal but suggested that 
its impact on access to credit may be marginal. One of these commenters 
described the proposal as a ``modest, but useful step'' that would 
bring incremental improvement. Generally, these commenters expressed 
concern that the risk of litigation would remain because the Seasoned 
QM definition would not confer safe harbor status at consummation. 
These commenters indicated that some creditors would be less willing to 
originate additional loans even if the proposal were finalized, and 
even if the borrower has the requisite ability to repay based on 
prudent underwriting practices, given that these loans would lack a QM 
safe harbor at consummation.

[[Page 86414]]

    Several commenters stated that access to credit would increase 
because the proposal would increase marketability to the secondary 
market of loans that are originated as non-QM or rebuttable presumption 
QM loans but season into a QM safe harbor, thereby increasing the 
ability of creditors to access secondary market liquidity to originate 
new loans. These commenters noted that the secondary market for non-QM 
loans is less liquid due to litigation and compliance risks as well as 
the costs of additional due diligence that many secondary market 
investors require prior to purchase. According to these commenters, 
eliminating assignee liability and litigation risks related to the ATR/
QM Rule for Seasoned QMs that are sold in the secondary market would 
improve the marketability of these loans and reduce the transaction 
costs associated with buying and selling Seasoned QMs. These commenters 
stated that this would have the effect of increasing the number of 
market participants, in both the primary and secondary markets.
    Commenters in support of the proposal also agreed with the Bureau's 
rationale for proposing a conclusive presumption of compliance with the 
ATR/QM Rule after three years of demonstrated loan performance. These 
commenters stated that if a borrower makes timely payments for an 
extended period of time, any subsequent default cannot reasonably be 
attributed to a creditor's underwriting or ATR determination at 
consummation. Some commenters noted that because the legal standard for 
the ATR/QM Rule requires a creditor to make its ATR determination at 
consummation, subsequent defaults due to economic disruptions or a 
change in life circumstances that cannot be attributed to an 
underwriting or ATR deficiency at the time of consummation.
    While these commenters agreed that performance over time is 
sufficient evidence of a creditor's ATR determination at consummation, 
they had varying opinions on the necessity of some of the additional 
consumer protections in the proposal, as discussed in greater detail in 
part VI below. While industry commenters generally supported 
maintaining the statutory product restrictions (such as the exclusion 
for loans with interest-only or negative amortization features, balloon 
payments, or terms that exceed 30 years), they expressed a range of 
views on whether ARMs and subordinate-lien loans should be eligible to 
season into QM status. They also expressed varying opinions on whether 
the proposed portfolio requirement is a necessary consumer protection 
or overly restrictive.

D. Comments in Opposition to a Seasoned QM Definition

    A number of consumer advocates and other non-profit organizations 
as well as an academic commenter opposed the Bureau's proposed Seasoned 
QM definition. These commenters generally expressed concerns over the 
evidentiary support for the proposed Seasoned QM definition, the 
Bureau's legal authority, the concept that demonstrated loan 
performance over an extended period of time can warrant a conclusive 
presumption of compliance with the ATR/QM Rule, and the impact on 
minority borrowers. Most of these commenters stated that if the Bureau 
were to finalize a Seasoned QM definition, the Bureau should retain the 
underwriting requirements, product restrictions, portfolio requirement, 
and other consumer protections included in the proposal. A joint 
comment from a number of non-profit organizations suggested that if the 
Bureau were to finalize a Seasoned QM definition, the final rule should 
incorporate a two-tiered approach, such that non-QM loans at 
consummation could only season into rebuttable presumption QM loans and 
only loans originated as rebuttable presumption QM loans could season 
into safe harbor QM loans.
    Nearly all commenters that opposed the Seasoned QM definition 
questioned the Bureau's legal authority to issue a rule that would 
limit a consumer's private right of action and foreclosure defense for 
violations of the ATR/QM Rule after three years. Commenters asserted 
that TILA's statutory requirements allow borrowers to raise a violation 
of the ATR/QM rule as a defense at any time in response to a 
foreclosure, and that Congress intended that these claims not be cut 
off. In addition, they maintained that, by extending the general one-
year statute of limitations under TILA to three years for ability-to-
repay claims, Congress recognized that it could take consumers a 
minimum of three years to recognize the right to bring an action 
against a creditor. Finally, commenters asserted that the performance 
requirements in the final rule are beyond the Bureau's authority to 
define QMs because Congress intended to limit the definition of QM to 
only those conditions that could be determined at or prior to the 
consummation of a loan. These commenters suggested that the Bureau's 
proposal is contrary to Congressional intent and exceeds the Bureau's 
authority.
    Many of these commenters also asserted that the Bureau did not 
provide enough evidentiary support and data analysis demonstrating that 
Seasoned QMs are the types of high-quality, low-cost loans for which 
Congress intended the Bureau to exercise its exemption authority. 
Commenters stated that the proposal could afford a QM safe harbor and a 
release from risk retention requirements to loans that are higher cost, 
have high DTIs, and have limited income documentation. These commenters 
asserted that the analysis in part VII of the proposal demonstrated 
that a meaningful percentage of loans suffer a disqualifying event 
after three years and that the proposal's three-year seasoning period 
is arbitrary. They also maintained that the Bureau's objective to 
increase access to credit and innovation in the mortgage market is not 
a sufficient justification absent a clearer explanation of how the 
proposal advances the statutory objective of affordable and responsible 
mortgage lending.
    One consumer advocate commenter argued that the proposal could have 
unanticipated disparate impacts on borrowers of color and would likely 
burden these borrowers with higher mortgage costs without affording 
them the underwriting and assessment protections that the Dodd-Frank 
Act sought to provide. The commenter pointed to historical evidence 
that minority borrowers have been steered into predatory, higher-priced 
mortgage products, and that the foreclosure crisis preceding the Dodd-
Frank Act resulted in a significant loss in housing wealth among 
minority homeowners. The commenter stated that the proposal would 
target vulnerable consumers and remove their statutorily provided life-
of-loan defense to foreclosure.
    Several consumer advocates also stated that the proposal could 
restrict remedies for high cost loans under the Home Ownership and 
Equity Protection Act of 1994 (HOEPA).\108\ They asserted that the 
Bureau has not made the necessary case to restrict remedies under HOEPA 
for violations of HOEPA's ability-to-repay requirements.
---------------------------------------------------------------------------

    \108\ Public Law 103-325, tit. I, subtit. B, 108 Stat. 2190 
(1994).
---------------------------------------------------------------------------

    Commenters also argued that loan performance should not be equated 
with ability to repay. They pointed to survey data and anecdotal 
evidence that many consumers take extraordinary measures to pay an 
unaffordable mortgage, such as drawing down retirement accounts, 
foregoing food, medicine, and utilities, or borrowing from relatives 
and friends. One consumer advocate commenter

[[Page 86415]]

cited its survey of housing counselors and attorneys, which showed that 
70 percent of respondents reported that their clients had forgone or 
decreased essential expenses in order to make payments for the first 
three years. Several commenters also asserted that the proposal is 
inconsistent with the statutory mandate that ability to repay is 
determined at origination, and that a change in circumstance (e.g., 
winning the lottery) whereby a borrower is able to pay a loan that was 
unaffordable at origination should not relieve creditors of their 
obligation to conduct a prudent ability-to-repay evaluation at 
origination. Several consumer advocates also expressed concern that the 
Seasoned QM definition may restrict the ability of the Bureau and other 
agencies to conduct supervisory examinations beyond the three-year 
seasoning period when the loan obtains QM safe harbor status.
    Several commenters also questioned the Bureau's use of the GSE 
representation and warranty framework as a model for the proposal's 
three-year seasoning period. They stated that the FHFA and GSE analysis 
is based on an investor's view of the aggregate financial impact on the 
GSEs' portfolios, as opposed to Congress's objective in enacting the 
ATR mandate to protect individual consumers from harm. They also noted 
that the GSE representation and warranty framework includes life-of-
loan exclusions for more material defects such as misstatements, 
misrepresentations, and omissions. Lastly, the commenters pointed out 
that the GSEs perform post-purchase quality control checks and audits 
shortly after acquiring the loans and before loans have defaulted, to 
ensure they are able to require creditors to repurchase defective loans 
within the three-year sunset. These commenters asserted that the 
proposal lacked similar quality control checks and exceptions for 
misconduct and fraud.
    Several commenters maintained that the proposal's assessment of the 
litigation risks associated with originating non-QM loans and the 
impact on cost of credit are unproven and inconsistent with the 
Bureau's findings in the January 2013 Final Rule. They noted that 
Congress has balanced the interest of consumers and creditors over the 
years, as evidenced by the limitations that TILA's general rules of 
liability place on possible litigation exposure. They also pointed out 
that there are practical limitations on litigation exposure for non-
compliance with ability-to-repay violations, such as access to a 
limited supply of legal services and public interest attorneys.

E. The Final Rule

    The Bureau is creating a Seasoned QM definition in this final rule 
because it concludes that providing a pathway to a QM safe harbor for 
performing non-QM and rebuttable presumption QM loans at consummation 
will maintain or expand access to responsible and affordable mortgage 
credit for loans that were originated in compliance with the ATR/QM 
Rule. The Bureau observed in the January 2013 Final Rule that increased 
legal certainty may benefit consumers if, as a result, creditors are 
encouraged to make loans that satisfy the statutory QM criteria, and 
further, that increased legal certainty may result in loans with a 
lower cost than would be charged in a context of legal 
uncertainty.\109\ Consistent with that earlier finding, the Bureau 
finds here that the increased compliance certainty and reduction in 
litigation risk associated with providing a conclusive presumption of 
compliance for Seasoned QMs will encourage creditors to lend to 
consumers whose loans may fall outside of the QM safe harbor at 
consummation but who nonetheless have the ability to repay. In 
particular, the Bureau concludes that there are a significant number of 
creditworthy consumers who are unable to readily obtain mortgage 
financing because they fall outside of the GSE and government lending 
guidelines, particularly those with non-traditional credit or income 
sources and self-employed borrowers. The Bureau also concludes that if 
combined with certain other factors, successful loan performance over a 
number of years indicates sufficient certainty to presume that loans 
were originated in compliance with the ATR/QM Rule.
---------------------------------------------------------------------------

    \109\ 78 FR 6408, 6507 (Jan. 30, 2013).
---------------------------------------------------------------------------

    This final rule provides a conclusive presumption of compliance for 
loans that are originated as non-QM or rebuttable presumption QM loans, 
that meet certain performance criteria and portfolio requirements over 
the seasoning period of at least 36 months, and that satisfy certain 
product restrictions, points-and-fees limits, and underwriting 
requirements. Specifically, the Seasoned QM definition is limited to 
fixed-rate, first-lien mortgages that also satisfy the product-feature 
requirements and limits on points and fees under the General QM loan 
definition. Under the final rule, creditors are required to consider 
the consumer's DTI ratio or residual income, income or assets other 
than the value of the dwelling, and debts and verify the consumer's 
income or assets other than the value of the dwelling and the 
consumer's debts, using the same consider and verify requirements 
established for General QMs in the General QM Final Rule. The final 
rule generally requires the original creditor or purchasing institution 
to hold the loan in portfolio until the end of the seasoning period, 
except that it permits a single whole-loan transfer, as further 
described in the section-by-section analysis of Sec.  
1026.43(e)(7)(iii) below.
    The Bureau adopts a Seasoned QM definition because it concludes 
that the definition strikes the best balance between the competing 
consumer protection and access-to-credit considerations described 
herein. Specifically, the Bureau concludes that, if coupled with other 
consumer protections, a seasoning period of at least 36 months provides 
a sufficient length of time to conclusively presume that a creditor 
reasonably determined a consumer's ability to repay at the time of 
consummation, while promoting continued access to credit and 
incentivizing creditors to make certain loans that may not have 
otherwise been made in the absence of potentially greater ability-to-
repay compliance certainty.\110\ As discussed in further detail in the 
section-by-section analysis of Sec.  1026.43(e)(7)(ii), the Bureau 
concludes that, for loans that meet the eligibility requirements to 
season into a QM safe harbor, it is reasonable to attribute any 
subsequent default after the 36-month seasoning period to a change in 
economic conditions or consumer circumstances that a creditor could not 
reasonably have anticipated from the consumer's application or the 
records used to determine repayment ability rather than to a failure by 
the creditor to make a reasonable

[[Page 86416]]

determination of ability to repay at consummation.
---------------------------------------------------------------------------

    \110\ This final rule, like the Assessment Report and the 
General QM Final Rule, reflects a shared underlying rationale that 
early payment difficulties indicate higher likelihood that the 
consumer may have lacked ability to repay at origination, and that 
delinquencies occurring soon after consummation are more likely 
indicative of a consumer's lack of ability to repay than later-in-
time delinquencies. The Assessment Report and the General QM Final 
Rule measure early distress as whether a consumer was ever 60 days 
or more past due within the first two years after origination. The 
performance requirements for Seasoned QMs reflect the Bureau's 
consideration of this measure of early distress, but also its view 
of what requirements strike the best balance between facilitating 
responsible access to the credit in question while assuring 
protection of the consumer interests covered by ATR requirements. 
Similarly, the Bureau recognizes that the definition of delinquency 
and performance requirements in Sec.  1026.43(e)(7) differ in some 
respects from the measure of early distress used in the Assessment 
Report, but concludes that this final rule's definition and 
performance requirements further the specific purposes of this final 
rule for the reasons explained in the section-by-section analyses of 
Sec.  1026.43(e)(7)(ii) and (iv)(A) below.
---------------------------------------------------------------------------

    The Bureau concludes that the Seasoned QM definition will maintain 
or expand access to credit for non-QM and rebuttable presumption QM 
loans that otherwise may not have been made due to perceived litigation 
or compliance risks, even if the creditor has confidence that it could 
originate the loan in compliance with the ATR requirements. Indeed, 
many industry commenters specifically indicated in their comments that 
they anticipated that the proposal would do so. The Bureau concludes 
that the Seasoned QM definition will also facilitate innovation in 
underwriting in the non-QM market to better serve consumers with non-
traditional credit profiles, allow for more flexibility to adapt to 
future changes in the work force and technology, and better support 
emerging research and technologies into alternative mechanisms to 
assess a consumer's ability to repay, such as cash flow underwriting. 
Several commenters noted that the impacts on access to credit are 
uncertain or unproven given these loans would be consummated without a 
conclusive presumption of compliance, and that therefore uncertainty 
and legal risk will persist with respect to these loans. The Bureau 
acknowledges that not every creditor may seek to expand their product 
offerings as a result of this final rule, but the Bureau nonetheless 
concludes the final rule will further its policy objectives, as many 
industry commenters indicated in their comments.
    Furthermore, the Bureau concludes that the objective of increasing 
access to responsible non-QM lending is of particular importance in 
light of recent contractions in that segment of the market. As 
described in the proposal, the non-QM market has been further reduced 
by the recent economic disruptions associated with the COVID-19 
pandemic, with most mortgage credit now available in the form of loans 
that obtain QM status at consummation. During periods of economic 
stress, investors seek safer assets such as cash and government-backed 
securities. Because non-QM loans are generally perceived as riskier by 
investors in part for the reasons discussed in the proposal, the 
decreases in originations related to the pandemic were particularly 
acute in the non-QM sector of the mortgage market. While the non-QM 
market has begun to recover, recent events have illustrated how 
investors' perception of risk--including uncertainty over compliance 
and litigation risk--can exacerbate the impacts on access to credit, 
particularly during periods of economic distress. The Bureau concludes 
that the Seasoned QM definition in this final rule should help 
counteract these impacts.
    The Bureau acknowledges the concerns expressed by some commenters 
that the Seasoned QM definition will limit a consumer's foreclosure-
related defense by recoupment or set off for alleged violations of the 
ATR requirements after three years under TILA section 130(k).\111\ 
These commenters suggested that availability of this defense indicates 
that Congress contemplated that consumers would default later than the 
ability-to-repay three-year statute of limitations period, and intended 
for consumers who defaulted at any point to be able to raise the 
creditor's failure to reasonably determine ability to repay as a 
defense against foreclosure.
---------------------------------------------------------------------------

    \111\ One academic commenter indicated that under the proposal, 
loans could season during pending litigation, cutting off 
affirmative claims filed within the statute of limitations period. 
Acknowledging this possibility, the Bureau nonetheless concludes 
that the final rule should not be revised to prevent that 
possibility in all cases. The reasoning underlying this final rule--
that satisfaction of the seasoning requirements for the duration of 
the seasoning period demonstrates that the creditor made a 
reasonable determination of the consumer's ability to repay at 
consummation--is not any less applicable when litigation is 
initiated during the seasoning period, but the consumer continues 
making on-time payments for the remainder of the seasoning period. 
The mere filing of the lawsuit itself does not indicate the creditor 
failed to make a reasonable determination of ability to repay at 
consummation. Accordingly, the Bureau does not believe there is a 
good reason to create and administer potentially complex rules 
managing the effects that various court or litigant actions should 
have on the seasoning period.
---------------------------------------------------------------------------

    The Bureau disagrees with this understanding of TILA section 130(k) 
and its implications regarding the scope of the Bureau's authority to 
define a QM. TILA section 130(k) authorizes a consumer to assert a 
violation of the ATR requirements in section 129C(a) as a defense in 
the event of judicial or nonjudicial foreclosure, without regard for 
the time limit on a private action for damages for such a violation. 
With TILA section 130(k), Congress provided consumers with a degree of 
relief from the finality generally associated with a statute of 
limitations period so that they may assert a violation of TILA section 
129C(a) as a matter of defense by recoupment or set off in connection 
with judicial or nonjudicial foreclosure. TILA section 130(k) thus 
conditions a consumer's actual right to obtain recoupment or set off on 
a finding that a creditor in fact violated TILA section 129C(a). But, 
on this matter of substantive law, TILA section 129C(b)(1) expressly 
provides that a creditor may presume its compliance with TILA section 
129C(a) with respect to any mortgage that falls within the definition 
of a QM. TILA section 129C(b)(2) and (3) grant the Bureau broad 
authority to revise, add to, or subtract from the criteria defining a 
QM for purposes of presuming compliance with TILA section 129C(a). 
Consistent with that authority, the final rule concludes that--if 
coupled with certain product restrictions and other factors--successful 
loan performance over a number of years indicates with sufficient 
certainty creditor compliance with TILA section 129C(a).
    Consequently, creditors of loans satisfying the final rule's 
requirements may lawfully invoke the loan's status to show that there 
is no ``violation'' for the purposes of TILA section 130(k), just as 
creditors properly originating loans under other QM categories have 
been able to do since the effective date of the January 2013 Final 
Rule. Consumers in turn may respond with evidence and argument 
establishing that a loan in fact does not satisfy the final rule's 
requirements to qualify as a Seasoned QM. But the Bureau does not read 
TILA section 130(k) to preserve for consumers a right to assert a 
violation of TILA section 129C(a) when the Bureau has determined as a 
matter of substantive law to conclusively presume the loan's compliance 
with TILA section 129C(a).\112\ This regulatory regime, under which QM 
status may affect a consumer's ability to raise a defense to 
foreclosure under TILA section130(k), is precisely what Congress 
intended and the introduction of a Seasoned QM category in no way 
alters that regime.
---------------------------------------------------------------------------

    \112\ Likewise, the Bureau disagrees with commenters who suggest 
that the final rule is a statute of limitations or statute of 
repose. In contrast to statutes of limitations or repose--which 
limit liability based solely on the passage of time measured after a 
certain event occurs--the performance requirements in the final rule 
are based on a series of events, periodic payments, that must occur 
before a loan can season. Moreover, whereas a statute of limitations 
or repose cuts off a consumer's right to raise a claim for reasons 
unrelated to the merits of a claim, the performance requirements in 
the final rule are probative of the merits of a section 129C(a) 
violation.
---------------------------------------------------------------------------

    The Bureau also disagrees with the concerns expressed by some 
commenters that the performance requirements in the final rule are 
beyond the Bureau's authority to define QMs because Congress intended 
to limit the definition of QM to only those conditions that could be 
determined before a loan is consummated. These commenters specifically 
point to the statutory QM provisions, which they argue are conditions 
directly related to underwriting that can be met prior to

[[Page 86417]]

consummation, unlike the performance requirements in the final rule.
    The Bureau concludes that nothing in the text of TILA section 
129C(b) prevents the Bureau from creating categories of QMs that are 
based on conditions that can be observed after a loan is consummated. 
The Bureau instead believes that QM conditions that are indicative of 
creditor compliance with the ATR requirements at consummation, 
regardless of when they are satisfied, are consistent with the text and 
structure of TILA section 129C(b). Congress only required that 
additional QM conditions be necessary or proper to ensure responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of TILA section 129C or necessary and 
appropriate to effectuate the purposes of TILA sections 129B and 129C. 
And although some of the statutory QM conditions focus on 
underwriting,\113\ most of these statutory conditions instead focus on 
prohibiting risky product features that may be probative of a 
creditor's non-compliance with the ATR requirements, such as interest-
only loans, or loan terms that exceed 30 years.\114\ The final rule 
goes beyond these statutory QM conditions with performance requirements 
and restrictions on creditors that, like the statutory product 
restrictions, are probative of whether a consumer was offered and 
received a loan on terms that the creditor reasonably determined 
reflected the consumer's ability to repay the loan. The Bureau does not 
believe that Congress intended to allow certain QM conditions that 
provide prospective evidence of creditor compliance with the ATR 
requirements but prohibit conditions that instead provide retrospective 
evidence of the same.\115\ Thus, while a creditor undoubtedly must 
determine a consumer's ability to repay at consummation, there is no 
indication that Congress intended to preclude or limit the Bureau's 
authority to defer its decision on the merits of presuming such 
compliance until the occurrence of later-in-time events.
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 1639c(b)(2)(A)(iii) through (v).
    \114\ 15 U.S.C. 1639c(b)(2)(A)(i) through (ii), (vii) through 
(viii); see 78 FR 6408, 6503-04 (Jan. 30, 2013).
    \115\ See 78 FR 6408, 6462 (Jan. 30, 2013).
---------------------------------------------------------------------------

    Commenters' insistence that QM status be determined at consummation 
is an approach the Bureau could have taken in the final rule. But the 
Bureau concludes that it has as much authority under TILA to grant QM 
status at consummation and to later withdraw it based on later-in-time 
events, on the one hand, as it does to condition the same presumption 
on the occurrence of post-consummation events, so long as the later-in-
time event is probative of or related to creditor compliance with the 
ATR requirements at consummation.\116\ The Bureau further concludes 
that the wait-and-see approach adopted in this final rule is the most 
reasonable approach in this context. As already noted above, consumer 
distress during the first three years of a loan supports an inference 
that consumers lacked the ability to repay at consummation. By 
withholding the presumption during the first three years of a loan, the 
final rule ensures that consumers are afforded greater consumer 
protections by being able to assert their rights without being forced 
to first default on their loan. The final rule also ensures that 
creditors benefit from the presumption only once there is enough 
evidence that the creditor made a reasonable ATR determination at 
consummation. The Bureau thus concludes that creating a new category of 
QMs for seasoned loans that meet the statutory QM requirements and 
other appropriate criteria is consistent with the Bureau's authority 
under and the purposes of TILA sections 129B and 129C.
---------------------------------------------------------------------------

    \116\ For example, if justified by the merits, the final rule 
could have mimicked the QM category adopted by Congress in EGRRCPA 
and granted QM status to all covered loans at consummation with the 
caveat that the loan could lose QM status if a borrower fails the 
performance requirements. 15 U.S.C. 1639c(b)(2)(F)(ii)(I)(aa), 
(iii).
---------------------------------------------------------------------------

    The Bureau recognizes the concerns expressed by many consumer 
advocate commenters that loan performance does not always equate to 
ability to repay and that consumers may take extraordinary measures to 
make payments on their mortgage. The Bureau acknowledged in the 
proposal that it is possible that a consumer could continue making on-
time payments for some period of time despite lacking the ability to 
repay by foregoing payments on other obligations, and that a meaningful 
percentage of non-QM loans may end up delinquent in later years. 
However, as discussed in part VIII below, in general, the later a 
delinquency occurs, the less likely it is due to a lack of ability to 
repay at consummation rather than a change in circumstance after 
consummation that the creditor could not have reasonably anticipated 
from the consumer's application or the records at consummation.\117\
---------------------------------------------------------------------------

    \117\ As illustrated in Figure 3 in part VIII below, the Bureau 
estimates that nearly two-thirds of loans that experience 
delinquencies that would prevent a loan from becoming a Seasoned QM 
under the final rule do so within 36 months, and the rate at which 
loans disqualify diminishes beyond 36 months.
---------------------------------------------------------------------------

    Furthermore, the Bureau finds that the final rule's inclusion of 
additional consumer protections mitigates the risks cited by commenters 
that a consumer lacks ability to repay but is nonetheless able to make 
timely payments for at least 36 months. As discussed further in the 
section-by-section analysis of Sec.  1026.43(e)(7)(i)(A) and (B), this 
final rule's product restrictions prohibit loan features such as 
adjustable rates, interest-only payments, and negative amortization 
that can lead to sharp payment increases shortly after consummation, 
and limits Seasoned QM status to first-lien loans. The final rule also 
generally requires the creditor or first purchaser to hold the loan in 
portfolio until the end of the seasoning period. As discussed in the 
section-by-section analysis of Sec.  1026.43(e)(7)(iii), this 
requirement gives creditors a greater incentive to make responsible and 
affordable loans at consummation by ensuring that the creditor or first 
purchaser of the loan bears the risk if the loan defaults during the 
seasoning period.
    Lastly, the final rule maintains the requirement that a creditor 
consider the consumer's DTI ratio or residual income, income or assets 
other than the value of the dwelling, and debts and verify the 
consumer's income or assets other than the value of the dwelling and 
the consumer's debts. As discussed in the section-by-section analysis 
of Sec.  1026.43(e)(7)(i)(B), this final rule aligns the Seasoned QM 
consider and verify requirements with that of the General QM Final 
Rule, which will help to ensure that loans for which the creditor has 
not made a good faith determination of the consumer's ability to repay 
do not season into a QM safe harbor.
    A number of commenters expressed concern that the Bureau lacks the 
evidentiary support and data analysis to demonstrate that Seasoned QMs 
are safe and high-quality loan products. These concerns are addressed 
in greater detail in part VIII below. The Bureau concludes that the 
delinquency and foreclosure analysis presented in part VIII, combined 
with the consumer protections discussed above, provides sufficient 
support to presume compliance with the ATR requirements when a loan 
performs over a seasoning period of at least 36 months and meets the 
other requirements in this final rule.
    Some consumer advocate commenters expressed concern about the 
potential effects of this final rule given that minority homeowners 
historically have had higher-priced mortgage products relative to White 
consumers with similar credit characteristics. These commenters stated 
that this final rule could result in unanticipated disparate

[[Page 86418]]

impacts on borrowers of color if they lose their set off or recoupment 
rights after three years. The Bureau recognizes that some creditors may 
violate Federal fair lending laws by charging certain borrowers higher 
prices on the basis of race or national origin compared to non-Hispanic 
White borrowers with similar credit characteristics, and the Bureau 
affirms its commitment to consistent, efficient, and effective 
enforcement of Federal fair lending laws.\118\ The Bureau further 
emphasizes that the QM criteria, including the Seasoned QM definition 
added by this final rule, do not create an inference or presumption 
that a loan satisfying the QM criteria is compliant with any Federal, 
State, or local anti-discrimination laws that pertain to lending. A 
creditor has an independent obligation to comply with the Equal Credit 
Opportunity Act \119\ and Regulation B,\120\ and an effective way for a 
creditor to minimize and evaluate fair lending risks under these laws 
is by monitoring its policies and practices and implementing effective 
compliance management systems.
---------------------------------------------------------------------------

    \118\ See, e.g., Consent Order, U.S. v. Bancorpsouth Bank, No. 
1:16-cv-00118, ECF No. 8 (N.D. Miss. July 25, 2016), https://files.consumerfinance.gov/f/documents/201606_cfpb_bancorpSouth-consent-order.pdf (joint action for discriminatory mortgage lending 
practices including charging African-American customers more for 
certain mortgage loans than non-Hispanic White borrowers with 
similar loan qualifications).
    \119\ 15 U.S.C. 1691 et seq.
    \120\ 12 CFR part 1002.
---------------------------------------------------------------------------

    This final rule's performance criteria, product restrictions, 
underwriting criteria, and portfolio requirements are designed to 
ensure that Seasoned QMs do not contain risky product features 
identified in TILA section 129C(b)(2) and that they are underwritten 
with appropriate attention to consumers' resources and obligations. 
Moreover, as discussed in the section-by-section analysis of Sec.  
1026.43(e)(7)(i)(E), this final rule also clarifies that the Seasoned 
QM definition does not extend to high-cost mortgages covered by HOEPA, 
thus excluding the highest cost loans on the market from eligibility 
for Seasoned QM status.
    As discussed above, commenters expressed differing views on the 
utilization of the GSE representation and warranty framework as an 
analog or model for the Seasoned QM definition. Many industry 
commenters supported the Seasoned QM definition, citing consistency 
with the industry standards set by the GSE representation and warranty 
framework and the mortgage insurers' rescission relief policies. One 
consumer advocate commenter, on the other hand, pointed out several 
differences relative to the Seasoned QM definition and questioned the 
utility of the GSE model as a precedent, as described above. The Bureau 
acknowledges that the GSE framework may have been developed based on an 
aggregate analysis of the GSE portfolio to provide certainty for 
lenders by clarifying when a loan may be subject to repurchase. 
However, the GSE framework nonetheless illustrates a recognition based 
on experience by both GSEs and lenders that after 36 months of strong 
loan performance, a default should fairly be attributed to a change in 
consumer's circumstances that the creditor could not have reasonably 
anticipated from the consumer's application or the records at 
consummation or other cause besides that of the lender's underwriting. 
The FHFA's stated purpose for the framework is to ``provide more 
certainty for lenders, facilitate greater liquidity to the primary 
market, and help increase access to credit without compromising safety 
and soundness.'' \121\ Furthermore, although commenters are correct 
that the GSE representation and warranty framework includes life-of-
loan exclusions for more material defects, this final rule includes 
many important and consumer-protective loan-level requirements, some of 
which are not required under the GSE framework, such as the portfolio 
requirement and exclusion for adjustable-rate mortgages.
---------------------------------------------------------------------------

    \121\ Fed. Hous. Fin. Agency, Representation and Warranty 
Framework, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Representation-and-Warranty-Framework.aspx (last visited Nov. 30, 
2020).
---------------------------------------------------------------------------

    The Bureau also acknowledges that the GSEs have developed a robust 
post-purchase quality control and audit framework to identify loan 
defects typically within a few months of consummation and well within 
the 36-month representation and warranty relief sunset. However, the 
Bureau concludes that this final rule's portfolio requirement provides 
similar incentives for creditors to originate loans with ability to 
repay. That is, if a financial institution purchases a loan from a 
creditor that it is required to hold in portfolio for 36 months, that 
purchaser has similar incentives to perform loan-level due diligence as 
the GSEs given the purchaser, like the GSEs, bears the credit risk of 
default. The prospect of being able to sell the loan only if it passes 
that due diligence creates a strong incentive for the creditor to 
employ rigorous underwriting at consummation akin to post-purchase 
quality control and audit under the GSE representation and warranty 
framework. In fact, given the size and scale of the GSEs' credit risk 
transfer programs whereby much of the risk of default for a large 
portion of the GSEs' guaranteed portfolio is syndicated to private 
market participants,\122\ purchasers that are required to hold the loan 
in portfolio for 36 months may have an even greater incentive to ensure 
the loans they purchase will perform well than the GSEs do. Moreover, 
like the GSEs, financial institutions have similar remedies to require 
the originating creditor to repurchase loans that were consummated with 
defects, including a lack of ability to repay. For these reasons, the 
Bureau has decided to base its adoption of a 36-month seasoning period 
in part on the 36-month representation and warranty sunset for GSE 
loans.
---------------------------------------------------------------------------

    \122\ Fed. Hous. Fin. Agency, Credit Risk Transfer, https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Credit-Risk-Transfer.aspx (last visited Nov. 30, 2020).
---------------------------------------------------------------------------

    Some consumer groups suggested that the Bureau's concern regarding 
potential and perceived litigation risks associated with originating 
non-QM loans and their impact on access to credit is inconsistent with 
the Bureau's findings in the January 2013 Final Rule and unproven. 
However, as discussed in the proposal, the analysis that the Bureau 
subsequently published in the Assessment Report found that some of the 
observed effect of the January 2013 Final Rule on access to credit was 
likely driven by creditors' interest in avoiding litigation or other 
risks associated with non-QM status, rather than by creditors' 
determinations that consumers were unlikely to repay the loan based on 
traditional indicators of creditworthiness.\123\ Many industry 
commenters also reaffirmed the impact of compliance uncertainty and 
litigation risk on creditors' willingness to originate non-QM and 
rebuttable presumption QM loans as well as the secondary market's 
willingness to purchase them. They asserted that the conclusive 
presumption of compliance for a Seasoned QM after 36 months would 
result in higher secondary market liquidity for these loans as 
investors are extended the liability protections that QM status 
provides. Based on its Assessment Report, external feedback to the 
Bureau, and the comments, the Bureau has concluded that many secondary 
market investors are unable or unwilling to accept the litigation risk 
associated with assignee liability particularly with respect to non-QM 
loans, which has in turn contributed to the relative scarcity of non-QM 
loans.
---------------------------------------------------------------------------

    \123\ See Assessment Report, supra note 47, at 118, 147, 150.

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[[Page 86419]]

VI. Section-by-Section Analysis

1026.43 Minimum Standards for Transactions Secured by a Dwelling

43(e) Qualified Mortgages

43(e)(1) Safe Harbor and Presumption of Compliance

    Section 1026.43(e)(1) currently provides that a creditor that makes 
a QM loan receives either a conclusive or rebuttable presumption of 
compliance with the repayment ability requirements of Sec.  1026.43(c), 
depending on whether the loan is a higher-priced covered transaction. 
Section 1026.43(e)(1)(i) currently provides that a creditor that makes 
a QM loan that is not a higher-priced covered transaction is entitled 
to a safe harbor from liability under the ATR provisions. The Bureau 
proposed to add Sec.  1026.43(e)(1)(i)(B), identifying Seasoned QMs as 
a separate category of QMs for which a creditor receives a conclusive 
presumption of compliance with ATR requirements, regardless of whether 
the loan is a higher-priced covered transaction. The proposal would 
have redesignated current Sec.  1026.43(e)(1)(i) as Sec.  
1026.43(e)(1)(i)(A). To conform with these changes, the Bureau proposed 
to revise comment 43(e)(1)-1 to add a reference to proposed Sec.  
1026.43(e)(7). The Bureau also proposed to make a technical correction 
to comment 43(e)(1)-1 to add references to Sec.  1026.43(e)(5) and (6). 
The Bureau further proposed to remove the first sentence of comment 
43(e)(1)(i)-1, which would have been duplicative of regulatory text, 
and to redesignate that comment as comment 43(e)(1)(i)(A)-1. For the 
reasons discussed below, the Bureau is finalizing the amendments to 
Sec.  1026.43(e)(1) and related commentary as proposed, with minor 
technical changes to the proposed commentary.

The Bureau's Proposal

    TILA section 129C(b) provides that loans that meet certain 
requirements are ``qualified mortgages'' and that creditors making QMs 
``may presume'' that such loans have met the ATR requirements. As 
discussed above, TILA does not specify whether the presumption of 
compliance means that the creditor receives a conclusive presumption or 
a rebuttable presumption of compliance with the ATR provisions. The 
Bureau concluded in the January 2013 Final Rule that the statutory 
language is ambiguous and does not mandate either interpretation and 
that the presumptions should be tailored to promote the policy goals of 
the statute.\124\ In the January 2013 Final Rule, the Bureau 
interpreted TILA to provide for a rebuttable presumption of compliance 
with the ATR provisions but used its adjustment and exception authority 
under TILA to establish a conclusive presumption of compliance for 
loans that are not ``higher-priced covered transactions.'' \125\
---------------------------------------------------------------------------

    \124\ 78 FR 6408, 6511 (Jan. 30, 2013).
    \125\ Id. at 6514.
---------------------------------------------------------------------------

    In the January 2013 Final Rule, the Bureau identified several 
reasons why the performance of QMs that are not higher-priced loans 
could suggest consumers have the ability to repay and should receive a 
safe harbor.\126\ The Bureau noted that the QM requirements would 
ensure that the loans do not contain certain risky product features and 
are underwritten with careful attention to consumers' DTI ratios.\127\ 
The Bureau also noted that a safe harbor would provide greater legal 
certainty for creditors and secondary market participants and might 
promote enhanced competition and expand access to credit.\128\ The 
Bureau noted that it was not possible to define by a bright-line rule a 
class of mortgages for which each consumer would have the ability to 
repay.\129\
---------------------------------------------------------------------------

    \126\ Id. at 6511.
    \127\ Id.
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

    In the Seasoned QM Proposal, the Bureau preliminarily concluded 
that, in conjunction with the QM statutory and other requirements in 
proposed Sec.  1026.43(e)(7), a loan's satisfaction of portfolio and 
seasoning requirements provides sufficient grounds for supporting a 
conclusive presumption that the creditor made a reasonable 
determination that the consumer had the ability to repay, in compliance 
with the ATR requirements. The Bureau also preliminarily concluded that 
satisfaction of the seasoning requirements--in particular, the fact 
that the consumer made timely payments for the duration of the 
seasoning period--supports the inference that the consumer was offered 
and received a loan on terms that the creditor reasonably determined 
reflected the consumer's ability to repay the loan. The Bureau noted 
that proposed Sec.  1026.43(e)(7) would require creditors to comply 
with TILA requirements applicable to QMs and minimum underwriting 
requirements. The Bureau also noted that the proposed requirements 
would ensure that the loans do not contain risky product features 
identified in TILA section 129C(b)(2), the loans are underwritten with 
attention to consumers' resources and obligations, and the conclusive 
presumption would be available to creditors only after the loans have 
performed for a substantial period of time.
    In the proposal, the Bureau stated that providing creditors with an 
alternative pathway to greater ATR compliance certainty for loans that 
satisfy the criteria set forth in proposed Sec.  1026.43(e)(7) may 
result in greater access to responsible, affordable mortgage credit. 
For example, creditors may be more willing to maintain or expand access 
to credit to consumers with non-traditional income or a limited credit 
history, or to employ innovative methods of assessing financial 
information, as these loans could season into safe harbor QMs with 
satisfactory performance. In addition, the Bureau noted in the proposal 
that, similar to the Small Creditor QM definition and the pathway to QM 
status provided in EGRRCPA section 101, the Seasoned QM definition 
would include a requirement for the creditor to hold the loan in 
portfolio. Finally, in the proposal the Bureau preliminarily concluded 
that, in combination with the other Seasoned QM requirements in 
proposed Sec.  1026.43(e)(7), the proposed portfolio requirement would 
provide an added layer of assurance that the Seasoned QM definition 
would encourage responsible non-QM lending and creditors would not make 
unaffordable loans.
    The Bureau sought comment on all aspects of the proposal that would 
be applicable to determining whether, by meeting the requirements of 
Sec.  1026.43(e)(7) for a particular loan, a creditor has demonstrated 
that the consumer had a reasonable ability to repay the loan according 
to its terms and the loan should be accorded safe harbor QM status. In 
addition, the Bureau sought comment on whether there are other 
approaches to providing QM status to seasoned loans that would better 
accomplish the Bureau's objectives.

Comments Received

    The Bureau received a number of comments relating to the proposed 
amendments to Sec.  1026.43(e)(1). As discussed in greater detail in 
part V above, industry commenters generally supported the proposed 
amendments to Sec.  1026.43(e)(1), and consumer advocate commenters 
generally opposed the proposed amendments to Sec.  1026.43(e)(1).
    Industry commenters generally expressed support for the Bureau's 
preliminary conclusion that a loan's satisfaction of the proposed 
seasoning requirements provides sufficient

[[Page 86420]]

grounds for supporting a conclusive presumption that the creditor made 
a reasonable determination that the consumer had the ability to repay, 
in compliance with the ATR requirements. These commenters stated that 
the proposed amendments to Sec.  1026.43(e)(1), and the proposal in 
general, retain consumer safety considerations and legal protections 
consistent with the existing ATR/QM Rule. Industry commenters agreed 
that providing safe harbor QM status to loans that season would 
incentivize responsible non-QM lending, while maintaining market 
stability. Several of these commenters noted that safe harbor QM status 
would provide legal certainty to loans that previously did not receive 
safe harbor QM status at consummation, and thereby remove risk 
associated with originating non-QM loans.
    Consumer advocate commenters opposed the Bureau's proposal, 
cautioning that a seasoning period is not an adequate basis for 
determining compliance with the ATR requirements. They also suggested 
that ATR determinations should remain a case-by-case determination, 
because there may be situations in which borrowers remain current on 
their loan for 36 months but did not have an ability to repay the loan 
at consummation.
    A joint comment from a number of consumer advocates and other non-
profit organizations suggested that the Bureau adopt a two-tiered 
approach to seasoning instead of providing all loans that season with 
safe harbor QM status. A two-tiered approach would allow non-QM loans 
to season into rebuttable presumption QM loans, and loans that are 
originated as QMs under other QM categories to season into safe harbor 
QM loans, after meeting the requirements for seasoning.
    Some commenters made suggestions to modify proposed Sec.  
1026.43(e)(7), which are discussed and addressed in the section-by-
section analysis of Sec.  1026.43(e)(7) below.

The Final Rule

    For the reasons discussed above and, pursuant to its authority 
under TILA section 105(a) as discussed below, the Bureau is finalizing 
Sec.  1026.43(e)(1) as proposed. As finalized, Sec.  1026.43(e)(1) 
provides that loans meeting the Seasoned QM requirements in Sec.  
1026.43(e)(7) obtain a conclusive presumption of compliance with the 
repayment ability requirements of Sec.  1026.43(c).
    Since the January 2013 Final Rule, the Bureau has noted that a safe 
harbor provides greater legal certainty for creditors and secondary 
market participants and may promote enhanced competition and expand 
access to credit. As discussed in part V above, the Bureau concludes 
that a Seasoned QM definition will encourage creditors to originate 
more responsible, affordable loans that are not QMs at consummation, 
and to ensure that responsible, affordable credit is not lost because 
of legal uncertainty in non-QM status.
    The Bureau declines to adopt the two-tiered approach that some 
commenters suggested that would provide only rebuttable presumption 
status to Seasoned QMs originated as non-QM loans. Adopting such a two-
tiered approach would lessen the prospect of legal certainty for loans 
originated as non-QMs and could thereby undermine the final rule's 
primary objective, which is to promote continued and potentially 
increased access to responsible and affordable credit by incentivizing 
the origination of non-QM loans that otherwise may not be made. The 
Bureau recognizes that it has decided in the General QM Final Rule not 
to provide a similar safe harbor at consummation to General QMs priced 
1.5 percentage points or more above APOR. That decision reflects a 
balancing of the relevant consumer protection and access-to-credit 
considerations in view of the Bureau's findings that (i) such loans 
have higher delinquency rates than lower-priced loans and (ii) it lacks 
sufficient evidence to suggest that having provided those loans with 
only a rebuttable presumption of ATR compliance since the January 2013 
Final Rule took effect has resulted in a significant disruption of 
access to responsible, affordable mortgage credit. A balance of the 
same statutory considerations leads the Bureau to a different 
conclusion with respect to Seasoned QMs. The final rule's performance 
requirements will ensure that only loans with strong early performance 
receive the Seasoned QM safe harbor. When coupled with the final rule's 
other requirements, the Bureau concludes that loans meeting the 
Seasoned QM definition will have demonstrated that the creditor made a 
reasonable determination of the ability to repay, regardless of the 
loan's QM or non-QM status at origination. The Bureau also recognizes 
that the prospect of a safe harbor three years after origination will 
provide a stronger incentive to originate loans that will be non-QM for 
at least the first three years than the prospect of a rebuttable 
presumption three years after origination. In light of these 
considerations, the Bureau concludes that extending Seasoned QMs a safe 
harbor strikes the best balance between consumer protection and 
ensuring continued access to responsible, affordable credit. The Bureau 
is therefore finalizing the amendments to Sec.  1026.43(e)(1) and 
related commentary as proposed, with minor technical changes to the 
proposed commentary.

Legal Authority

    The Bureau is revising Sec.  1026.43(e)(1) pursuant to its 
adjustment authority under TILA section 105(a) to establish a 
conclusive presumption of compliance for loans that meet the criteria 
in proposed Sec.  1026.43(e)(7). The Bureau concludes that providing a 
safe harbor for seasoned loans is necessary and proper to facilitate 
compliance with and to effectuate the purposes of section 129C and 
TILA, including to assure that consumers are offered and receive 
residential mortgage loans on terms that reasonably reflect their 
ability to repay the loans. The Bureau also concludes that providing 
such a safe harbor is consistent with the Bureau's authority under TILA 
section 129C(b)(3)(B)(i) to prescribe regulations that revise, add to, 
or subtract from the criteria that define a QM upon a finding that such 
regulations are necessary or proper to ensure that responsible, 
affordable mortgage credit remains available to consumers in a manner 
consistent with the purposes of this section, necessary and appropriate 
to effectuate the purposes of TILA sections 129B and 129C, to prevent 
circumvention or evasion thereof, or to facilitate compliance with such 
sections.

43(e)(2) Qualified Mortgage Defined--General

    Section 1026.43(e)(2) sets out the general criteria for meeting the 
definition of a QM and provides exceptions for QMs covered by 
requirements set out in other specific paragraphs in Sec.  1026.43(e). 
The Bureau proposed a conforming amendment to Sec.  1026.43(e)(2) to 
include a reference to Sec.  1026.43(e)(7), which sets out the 
requirements applicable to Seasoned QMs and is described in the 
section-by-section analysis below. The Bureau did not receive comments 
specifically relating to proposed Sec.  1026.43(e)(2). To conform with 
the other amendments in this final rule, the Bureau is adopting the 
amendment to Sec.  1026.43(e)(2) as proposed.

43(e)(7) Qualified Mortgage Defined--Seasoned Loans

    The Bureau is adding Sec.  1026.43(e)(7) to define a new category 
of QMs, Seasoned QMs, for covered transactions

[[Page 86421]]

that meet certain criteria. The Bureau concludes that providing 
creditors an alternative path to a QM safe harbor for these types of 
loans is likely to increase creditors' willingness to make these loans 
despite their ineligibility for a QM safe harbor at consummation. The 
Bureau recognizes that there is some risk that a consumer can lack an 
ability to repay at loan consummation yet manage to make timely 
payments for the seasoning period defined in Sec.  1026.43(e)(7)(iv)(C) 
of this final rule. The Bureau concludes that such risk, as well as the 
potential benefits that a Seasoned QM might offer in terms of fostering 
access to responsible, affordable mortgage credit, would vary depending 
on the loan characteristics. To mitigate this risk, the Bureau is 
limiting Seasoned QMs to first-lien covered transactions that satisfy 
the other requirements in Sec.  1026.43(e)(7), as explained below.
    The Bureau concludes that adding a definition of Seasoned QM for 
covered transactions, as well as establishing the requirements for 
Seasoned QMs in Sec.  1026.43(e)(7) discussed below, is consistent with 
the Bureau's authority under TILA section 129C(b)(3)(B)(i) to prescribe 
regulations that revise, add to, or subtract from the criteria that 
define a qualified mortgage upon a finding that such regulations are 
necessary or proper to ensure that responsible, affordable mortgage 
credit remains available to consumers in a manner consistent with the 
purposes of TILA section 129C, necessary and appropriate to effectuate 
the purposes of TILA sections 129B and 129C, to prevent circumvention 
or evasion thereof, or to facilitate compliance with such sections. The 
Bureau finds that the provisions in Sec.  1026.43(e)(7) establishing 
criteria to define a Seasoned QM are necessary or proper to ensure that 
responsible, affordable mortgage credit remains available to consumers 
in a manner consistent with and appropriate to the purposes of TILA 
sections 129B and 129C, which include assuring that consumers are 
offered and receive residential mortgage loans on terms that reasonably 
reflect their ability to repay the loan and that responsible, 
affordable mortgage credit remains available to consumers. In 
particular, the Bureau has concluded that establishing a QM safe harbor 
pathway for seasoned loans is likely to increase creditors' willingness 
to make additional loans that do not qualify for a QM safe harbor at 
origination, or to make such loans with better pricing. The Bureau 
finds that limiting Seasoned QMs to covered transactions that meet the 
requirements in Sec.  1026.43(e)(7) provides assurance that those loans 
that may qualify for Seasoned QM status after the seasoning period are 
made to creditworthy consumers.
    In addition, TILA section 129C(b)(3)(A) provides the Bureau with 
authority to prescribe regulations to carry out the purposes of the 
qualified mortgage provisions--to ensure that responsible, affordable 
mortgage credit remains available to consumers in a manner consistent 
with the purposes of TILA section 129C. TILA section 105(a) also 
provides authority to the Bureau to prescribe regulations to carry out 
the purposes of TILA, including the purposes of the qualified mortgage 
provisions, and states that such regulations may contain such 
additional requirements, classifications, differentiations, or other 
provisions and may further provide for such adjustments and exceptions 
for all or any class of transactions that the Bureau judges are 
necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith. TILA section 129C(b)(2)(A)(vi) provides authority to the 
Bureau specifically to establish guidelines or regulations relating to 
ratios of total monthly debt to monthly income or alternative measures 
of ability to pay regular expenses after payment of total monthly debt, 
taking into account the income levels of the borrower and such other 
factors as the Bureau may determine are relevant and consistent with 
the purposes described in TILA section 129C(b)(3)(B)(i). Accordingly, 
the Bureau exercises its authority under TILA sections 105(a), 
129C(b)(2)(A)(vi), (3)(A), and (3)(B)(i) to adopt Sec.  1026.43(e)(7) 
for the reasons discussed above and below.

43(e)(7)(i) General

    The Bureau proposed adding Sec.  1026.43(e)(7) to define a new 
category of QMs for covered transactions that meet certain criteria. 
The Bureau proposed as initial criteria under Sec.  1026.43(e)(7)(i) 
that Seasoned QM status would be available for first-lien covered 
transactions that meet certain additional requirements. Additional 
proposed requirements were set out generally in Sec.  
1026.43(e)(7)(i)(A) through (D) and included restrictions on product 
features and points and fees, as well as certain underwriting and 
performance requirements. The proposed criteria and related public 
comments are discussed below.
    In its proposal the Bureau tentatively concluded that limiting 
Seasoned QMs to first-lien covered transactions that satisfy the other 
requirements in proposed Sec.  1026.43(e)(7) recognizes both the risk 
of consumers lacking an ability to repay at consummation and the 
potential benefits of fostering access to responsible, affordable 
mortgage credit through a Seasoned QM category. This final rule adopts 
in the introductory text for Sec.  1026.43(e)(7)(i) the requirement 
that a Seasoned QM be a first-lien covered transaction as proposed.

Comments Received

    A significant number of industry commenters and industry trade 
associations requested that the Bureau extend Seasoned QM eligibility 
to subordinate liens that otherwise meet the criteria. Several of these 
commenters noted that closed-end subordinate liens are included within 
the broader scope of requirements in Sec.  1026.43. One industry 
commenter stated that its subordinate liens have better repayment and 
lower delinquencies than the overall first-lien industry and noted that 
the demand for cash-out subordinate-lien loans may grow as consumers 
looking to equity as a source of funds in a future, higher-interest-
rate environment also want to retain the advantage of current, 
historically low rates on the remaining balance of their first-lien 
mortgages. Although two industry commenters suggested generally that 
the Bureau could make extension of Seasoned QM eligibility to 
subordinate liens more acceptable by tailoring the performance 
requirements for subordinate liens, the commenters did not provide 
specific suggestions. Commenters supporting extension of Seasoned QM 
eligibility to subordinate liens stated that doing so would encourage 
innovation, reduce litigation risk, and expand access to credit. An 
industry commenter, without elaboration, expressly supported limiting 
Seasoned QMs to first-lien loans, while a consumer advocate commenter 
stated that, if a Seasoned QM definition is finalized, the loan 
characteristics included in the proposal to limit the scope of the 
definition should be retained, even though those characteristics would 
not adequately protect consumers.

The Final Rule

    For the reasons stated below, the Bureau adopts in Sec.  
1026.43(e)(7)(i) the requirement that a Seasoned QM be a first-lien 
covered transaction, as proposed. The Bureau continues to recognize, as 
it did in the proposal, that the potential risks and benefits of a 
Seasoned QM category will tend to vary depending on loan 
characteristics. The Bureau is exercising its discretionary

[[Page 86422]]

authority to establish an additional way in which covered transactions 
can achieve qualified mortgage status under the ATR requirements of 
TILA and Regulation Z. However, it is not apparent that extending 
Seasoned QM eligibility to subordinate lien loans can be done in a 
manner that improves access to credit without introducing unnecessary 
complexity in application.\130\ Subordinate-lien loans may be an 
example of loans with an elevated risk of showing timely payments even 
when a consumer lacks ability to repay. A consumer may make on-time 
payments on the second-lien loan but fail to make payments on the 
first-lien loan because the consumer is unable to afford the 
combination of the two periodic payments and the second-lien payment is 
often smaller than the first-lien payment.\131\ In light of the 
significant changes being made in the General QM Final Rule, the Bureau 
concludes that limiting Seasoned QM status to first-lien transactions 
will provide an opportunity for the market to gain experience with how 
access to credit and consumer ability-to-repay protections will be 
affected by both the portfolio and performance criteria in the new 
Seasoned QM definition and the revised underwriting requirements and 
other criteria in the General QM Final Rule. This experience could help 
inform any future changes to the Seasoned QM criteria that may be in 
accordance with the purposes of TILA.
---------------------------------------------------------------------------

    \130\ The Bureau currently has limited data to use in analyzing 
the interaction of first- and subordinate-lien loans and how that 
interaction affects the consumers' ability to repay those mortgages 
over time. As discussed in part VIII below, the primary data source 
relating to loan performance that the Bureau has relied upon in the 
Seasoned QM Proposal and this final rule is the National Mortgage 
Database (NMDB), which does not include subordinate-lien mortgages. 
The NMDB data include de-identified performance information for a 
nationally representative 5 percent sample of active first-lien 
mortgages. See Bureau of Consumer Fin. Prot., Sources and Uses of 
Data at the Bureau of Consumer Financial Protection at 55-56 (Sept. 
2018), https://files.consumerfinance.gov/f/documents/bcfp_sources-uses-of-data.pdf; Robert B. Avery et al., National Mortgage Database 
Technical Report 1.2, at 1 (Nat'l Mortg. Database, Bureau of 
Consumer Fin. Prot., and Fed. Housing Fin. Agency, Technical Report 
Series, 2017), https://www.fhfa.gov/PolicyProgramsResearch/Programs/Documents/NMDB-Technical-Report_1.2_10302017.pdf.
    \131\ For example, a 2012 New York Federal Reserve Bank study 
noted that among consumers who are seriously delinquent on their 
first-lien loans for more than a year and have a second-lien loan, 
about 20 to 30 percent of consumers are current on their second-lien 
loans. The authors suggested possible explanations for why some 
consumers remain current on their subordinate-lien loans even a year 
beyond a continuing delinquency on their first-lien loan, including 
that (1) consumers may choose to pay as many bills as possible each 
month so will prioritize smaller bills over first-lien mortgages 
with likely larger payments; and (2) consumers may strategically 
default on first-lien loans in order to qualify for targeted 
modification programs. Donghoon Lee et al., Fed. Reserve Bank of New 
York, A New Look at Second Liens (Staff Report No. 569) (Aug. 2012), 
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr569.pdf.
---------------------------------------------------------------------------

    The Bureau notes, as it did in the proposal, that loans that 
satisfy another QM definition at consummation also could be Seasoned 
QMs, as long as the requirements of Sec.  1026.43(e)(7) are met.\132\ A 
loan that becomes a Seasoned QM after seasoning might have been 
eligible as a QM at consummation under the General QM, Small Creditor 
QM, or EGRRCPA QM definitions. Although the various QM categories may 
overlap, each QM category is based on a particular set of factors that 
support a presumption that the creditor at consummation complied with 
the ATR requirements, and each QM category imposes requirements of 
varying degrees of restrictiveness relative to others. For example, 
EGRRCPA section 101 provides a presumption of compliance starting at 
consummation and is available only to insured depository institutions 
and insured credit unions with assets below $10 billion who hold those 
loans in portfolio, except that transfer of the loans is permitted in 
certain limited circumstances. QM status under EGRRCPA section 101 is 
available to both fixed and variable rate mortgages, as well as 
subordinate-lien loans, and section 101 also does not impose any 
requirements on post-consummation loan performance. The Seasoned QM 
category established in this final rule, by contrast, is not limited by 
creditor size, and is available only for fixed-rate, first-lien loans 
that meet a portfolio requirement, and only after a seasoning period 
during which the loans must meet performance requirements. The Bureau 
concludes that the Seasoned QM category and the EGRRCPA QM category, 
therefore, identify unique and discrete factors that, for different 
reasons, support a presumption of creditor compliance with the ATR 
requirements. The Bureau similarly concludes that because each QM 
category is based on a distinct set of factors that support a 
presumption of compliance with ATR requirements, it is possible for 
some transactions to fall within the scope of multiple QM categories. 
Accordingly, the Bureau determines that it is appropriate to exercise 
its authority under TILA sections 105(a), 129C(b)(2)(A)(vi), (3)(A), 
and (3)(B)(i) to make the Seasoned QM definition available to any 
first-lien covered transaction that meets the requirements in Sec.  
1026.43(e)(7), including transactions that might be eligible at 
consummation for the General QM loan definition, the Small Creditor QM 
definition, or the EGRRCPA QM definition.
---------------------------------------------------------------------------

    \132\ 85 FR 53568, 53581-82 (Aug. 28, 2020).
---------------------------------------------------------------------------

43(e)(7)(i)(A)

    The Bureau proposed to add Sec.  1026.43(e)(7)(i)(A) which would 
limit the Seasoned QM definition to fixed-rate mortgages with fully 
amortizing payments. Proposed Sec.  1026.43(e)(7)(i)(A) would have 
applied the definition of fixed-rate mortgage set out in Sec.  
1026.18(s)(7)(iii). Section 1026.18(s)(7)(iii) defines fixed-rate 
mortgage as a transaction secured by real property or a dwelling that 
is not an adjustable-rate mortgage or a step-rate mortgage.\133\ In 
addition, proposed Sec.  1026.43(e)(7)(i)(A) would have applied the 
definition of fully amortizing payments set out in Sec.  1026.43(b)(2). 
Section 1026.43(b)(2) defines fully amortizing payments as a periodic 
payment of principal and interest that will fully repay the loan amount 
over the loan term.
---------------------------------------------------------------------------

    \133\ As applicable to the definition of fixed-rate mortgage, 
Sec.  1026.18(s)(7)(i) defines adjustable-rate mortgage as a 
transaction for which the APR may increase after consummation, and 
Sec.  1026.18(s)(7)(ii) defines step-rate mortgage as a transaction 
for which the interest rate will change after consummation, and the 
rates that will apply and the periods for which they will apply are 
known at consummation.
---------------------------------------------------------------------------

    Proposed comment 43(e)(7)(i)(A)-1 would have clarified that a 
covered transaction that is an adjustable-rate mortgage or a step-rate 
mortgage would not be eligible to become a Seasoned QM. Proposed 
comment 43(e)(7)(i)(A)-2 would have clarified that loans could become 
Seasoned QMs only if the scheduled periodic payments on them do not 
require a balloon payment to fully amortize the loan within the loan 
term. Proposed comment 43(e)(7)(i)(A)-2 also would have clarified that 
the requirement that a Seasoned QM have fully amortizing payments does 
not prohibit a qualifying change, as defined in the proposal, that is 
entered into during or after a temporary payment accommodation in 
connection with a disaster or pandemic-related national emergency.\134\
---------------------------------------------------------------------------

    \134\ Qualifying changes are discussed more fully below in the 
section-by-section analysis of Sec.  1026.43(e)(7)(iv).
---------------------------------------------------------------------------

    The Bureau adopts Sec.  1026.43(e)(7)(i)(A) and comments 
43(e)(7)(i)(A)-1 and -2 as proposed, except that comment 
43(e)(7)(i)(A)-2 is revised to clarify that Sec.  1026.43(e)(7)(i)(A) 
does not prohibit a qualifying change that is entered into during or 
after a temporary payment

[[Page 86423]]

accommodation in connection with a disaster or pandemic-related 
national emergency, even if the qualifying change involves a balloon 
payment or lengthened loan term.

Comments Received

    Some industry commenters recommended amending the proposed criteria 
to permit ARMs to become Seasoned QMs, with a couple of these 
commenters suggesting that the seasoning period begin from the date of 
the new payment when the interest rate first adjusts. One industry 
commenter suggested that the Bureau could draft the final rule in a way 
that would extend eligibility to ARMs at least for purposes of 
relieving securitizers of separate risk retention requirements on those 
loans, so as to allow resultant cost savings to be passed on to 
consumers at origination.\135\ Other industry commenters and a number 
of consumer advocate commenters supported the proposal's limitation to 
fixed-rate loans. Consumer advocate commenters that were not supportive 
of adding a Seasoned QM definition generally nonetheless supported 
excluding from any final rule adjustable-rate and balloon features, 
which they described as exacerbating the risks of unaffordable and 
irresponsible lending. One industry commenter supportive of the 
limitation to fixed-rate loans stated that the General QM loan 
definition should be applied to ARMs because payments can increase over 
time beyond the proposed seasoning period.
---------------------------------------------------------------------------

    \135\ The commenter noted that the definition of qualified 
residential mortgage (QRM) used by other Federal regulatory agencies 
to exempt securities from Dodd-Frank Act section 941 risk retention 
requirements is limited by the Bureau's definition of QM. An 
industry trade association also addressed the separate QRM 
requirements but suggested only that the Bureau should work with 
other regulators to reform assignee liability and develop a 
mechanism that enables investors to put back loans with defects at 
origination.
---------------------------------------------------------------------------

    Commenters generally supported the Bureau's proposal to allow only 
loans with fully amortizing payments to become Seasoned QMs. Several 
industry and industry trade association commenters, however, requested 
that the Bureau clarify that the restriction on balloon payments does 
not affect a loan's eligibility for Seasoned QM status if the loan is 
restructured to include a balloon payment as part of a qualifying 
change that is entered into during or after a temporary payment 
accommodation in connection with a disaster or pandemic-related 
national emergency.

The Final Rule

    For the reasons stated below, the Bureau adopts Sec.  
1026.43(e)(7)(i)(A) as proposed. The final rule limits Seasoned QMs to 
fixed-rate mortgages, excluding ARMs. ARMs typically have an 
introductory interest rate that is applicable for several years. The 
introductory interest rate for a typical ARM could be in place for some 
or all of the seasoning period and could extend beyond the seasoning 
period. After the introductory interest rate expires, the interest rate 
adjusts periodically and could increase through the life of the loan.
    The Bureau concludes that a consumer's payment history immediately 
after consummation of an ARM would not be a reliable indicator of 
whether at consummation the creditor reasonably determined the 
consumer's continuing ability to repay the loan after any interest rate 
adjustment, which could increase the consumer's periodic payment 
amount. In addition, because an ARM may continue to reset periodically 
after the first interest rate reset date, even a seasoning period that 
begins on the first reset date would not necessarily be sufficient to 
assure a consumer's ability to repay after the seasoning period. Given 
this possibility for increases in payment amounts in later years, 
therefore, timely payments during the seasoning period are not as 
strong of an indicator on an ARM as they are on a fixed-rate mortgage 
of the consumer's ability to repay at the time of consummation. 
Although a few commenters provided suggestions concerning how the 
Bureau might provide some Seasoned QM eligibility to ARMs, the 
suggestions were only general in nature and did not include analyses 
that would support modification of the proposal. The Bureau therefore 
is not extending eligibility for the new Seasoned QM category to ARMs.
    Similarly, the Bureau remains concerned that, as a general matter, 
the ability of a consumer to stay current on mortgage payments during 
the seasoning period would not be reliable as an indicator that at 
consummation a consumer had the ability to meet balloon payment 
obligations beyond the seasoning period. In this final rule, the Bureau 
is not extending eligibility for the new Seasoned QM category to loans 
that do not provide for fully amortizing payments. As highlighted by 
several commenters, however, the Bureau understands that, in instances 
of financial hardship, including during the current COVID-19 pandemic, 
creditors and consumers often agree to restructure loans to defer 
delinquent amounts and create a balance due at maturity or payoff of 
the loan. As suggested by these commenters, the Bureau is revising 
proposed comment 43(e)(7)(i)(A)-2 to clarify that the general Seasoned 
QM criteria set out in Sec.  1026.43(e)(7)(i)(A) do not prohibit a 
qualifying change that is entered into during or after a temporary 
payment accommodation in connection with a disaster or pandemic-related 
national emergency, even if the qualifying change involves a balloon 
payment or lengthened loan term. Qualifying changes are discussed in 
more detail in the section-by-section analysis of Sec.  
1026.43(e)(7)(iv)(B), below.

43(e)(7)(i)(B)

    TILA section 129C(b)(1) provides a presumption of compliance with 
ATR requirements if a loan is a qualified mortgage. TILA section 
129C(b)(2)(A) defines a qualified mortgage as a loan that includes 
general restrictions on product features and points and fees and meets 
certain underwriting requirements. Regulation Z Sec.  1026.43(e)(2) 
codifies these criteria in the Bureau's definition of a General QM. In 
the Seasoned QM Proposal, the Bureau proposed adding Sec.  
1026.43(e)(7)(i)(B) to extend to Seasoned QMs the same general 
restrictions on product features and points and fees that exist under 
the General QM and Small Creditor QM definitions, and to impose the 
same or similar requirements to consider and verify certain consumer 
information as part of the underwriting process.\136\ Proposed comment 
43(e)(7)(i)(B)-1 stated that a loan that complies with the consider and 
verify requirements of any other qualified mortgage definition would be 
deemed to comply with the consider and verify requirements applicable 
to a Seasoned QM.
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    \136\ Proposed Sec.  1026.43(e)(7)(i)(B) would have incorporated 
by cross-reference the QM requirements set out for Small Creditor 
QMs in Sec.  1026.43(e)(5)(i)(A) and (B). Those Small Creditor QM 
requirements generally cross-referenced the existing General QM 
requirements in Sec.  1026.43(e)(2), except for the requirements in 
paragraph (e)(2)(vi) of that section, which established a DTI limit. 
In the Seasoned QM Proposal, the Bureau noted that it had recently 
proposed certain conforming changes to Sec.  1026.43(e)(5)(i)(A) and 
(B) in the General QM proposal. 85 FR 53568, 53583 n.120 (Aug. 28, 
2020). As discussed above, the Bureau is issuing this final rule 
simultaneously with the General QM Final Rule.
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    For the reasons described below, the Bureau adopts Sec.  
1026.43(e)(7)(i)(B) as proposed, except that the criteria relating to 
prohibited product features, points-and-fees cap, and requirements to 
consider and verify certain consumer

[[Page 86424]]

information are established by direct cross-reference to the relevant 
General QM requirements in Sec.  1026.43(e)(2), as amended by the 
General QM Final Rule. The Bureau has decided not to adopt proposed 
comment 43(e)(7)(i)(B)-1 because, with the revisions made to Sec.  
1026.43(e) in the General QM Final Rule and this final rule, the 
comment is unnecessary and could be confusing.

Comments Received

    Additional Criteria, Generally. Commenters generally agreed that 
only loans with QM product protections should be allowed to season. 
Some of those commenters objected to the addition of a Seasoned QM 
definition--with one consumer advocate commenter stating that the 
additional loan features are not a bulwark against improvident 
lending--but stated that if the rule is adopted, the additional 
required characteristics in Sec.  1026.43(e)(7)(i)(A) through (D) 
should be retained. An industry trade association stated that the 
product restrictions and continuance of underwriting requirements, 
along with performance requirements, provide sufficient assurance of 
ATR compliance. Another industry trade association noted that aligning 
the product features and underwriting requirements of different kinds 
of QMs is appropriate and avoids inappropriately incentivizing any 
particular category of QMs.
    Product and Points-and-Fees Restrictions. A few commenters 
addressed particular aspects of the Seasoned QM criteria that the 
Bureau proposed to adopt by cross-reference to other QM requirements. 
Several industry commenters requested that the Bureau clarify that 
limiting the Seasoned QM definition to loans with terms not exceeding 
30 years does not affect a loan's eligibility for Seasoned QM status 
when the loan is restructured to include a longer repayment period as 
part of a qualifying change that is entered into during or after a 
temporary payment accommodation in connection with a disaster or 
pandemic-related national emergency. One industry commenter recommended 
that the limit on points and fees be eliminated, while another 
supported including the limit in the proposal. One industry trade 
association advocated generally to include only points and fees paid 
directly by the consumer in the calculation of the 3 percent cap, and 
another stated that the calculation should exclude fees paid to 
affiliated service providers. An academic commenter expressed concern 
that the proposal did not address separate Dodd-Frank Act prepayment 
penalty restrictions and requested that the Bureau affirm the 
applicability of those restrictions.
    Underwriting Requirements. Several commenters referenced and 
incorporated the comments they had submitted on the consider and verify 
requirements in the General QM Proposal and indicated that the 
requirements in the General QM and Seasoned QM rules should be aligned. 
Comments on the underwriting requirements generally were consistent 
between the General QM Proposal and the Seasoned QM Proposal. 
Commenters widely recognized the importance of the consider and verify 
requirements in underwriting a QM loan. An industry trade association 
supported the proposal's avoidance of using the appendix Q methodology 
for calculating consumer income and debts and commented that 
underwriting requirements should provide flexibility to allow for 
innovation. An industry trade association noted a concern that the 
final language should not inadvertently introduce a reasonableness 
standard for the DTI ratio through application of the Sec.  
1026.43(c)(7) calculation requirement. Some consumer advocate 
commenters cautioned that lax underwriting requirements, especially if 
in combination with relaxed product features, would not comply with 
TILA and would not be consistent with congressional intent. On the 
other hand, commenters noted that alignment of underwriting 
requirements and product features among different QM categories would 
help ensure these requirements do not create an incentive to make one 
type of QM loan rather than another.

The Final Rule

    For the reasons stated below, the Bureau adopts in Sec.  
1026.43(e)(7)(i)(B) the proposed prohibited product features and points 
and fees and underwriting requirements as part of the Seasoned QM 
definition. In this final rule, however, the Bureau is adopting those 
additional criteria by direct cross-reference to the provisions in 
Sec.  1026.43(e)(2)(i) through (v) of the General QM loan definition, 
rather than by indirectly cross-referencing the same requirements as 
adopted in Sec.  1026.43(e)(5)(i)(A) and (B) for Small Creditor QMs, as 
the Bureau had proposed.\137\ The General QM Final Rule issued 
simultaneously with this final rule revises the General QM loan 
definition. As a result of these changes, the Bureau concludes that 
referencing the General QM criteria directly in Sec.  
1026.43(e)(7)(i)(B) is preferable. The General QM criteria will be 
widely used by creditors in connection with General QMs, and creditors 
will be able to apply those criteria consistently in connection with 
Seasoned QMs.
---------------------------------------------------------------------------

    \137\ The Bureau did not propose to adopt in this final rule any 
DTI limit, pricing threshold, or similar requirement applicable 
under Sec.  1026.43(e)(2)(vi) to covered transactions in the General 
QM loan definition. The Small Creditor QM definition also does not 
include any such criteria.
---------------------------------------------------------------------------

    In addition to applying the previously established criteria, 
discussed above, that a Seasoned QM be a first-lien covered transaction 
with a mortgage that has a fixed rate and fully amortizing payments, 
applying the relevant criteria in Sec.  1026.43(e)(2)(i) through (v) 
will mean that a covered transaction can qualify as a Seasoned QM only 
if:
    1. The covered transaction provides for regular periodic payments 
that are substantially equal;
    2. There is no negative amortization and no interest-only or 
balloon payment;
    3. The loan term does not exceed 30years;
    4. The total points and fees generally do not exceed 3 percent of 
the loan amount; and
    5. The creditor considers the consumer's DTI ratio or residual 
income, income or assets other than the value of the dwelling, and 
debts and verifies the consumer's income or assets other than the value 
of the dwelling and the consumer's debts.\138\
---------------------------------------------------------------------------

    \138\ In addition, because Sec.  1026.43(e)(7)(i)(B) 
incorporates the requirements of Sec.  1026.43(e)(2)(iv), the 
underwriting for the loan must use a payment schedule that fully 
amortizes the loan over the loan term and takes into account the 
monthly payment for mortgage-related obligations.
---------------------------------------------------------------------------

    The Bureau concludes that these additional criteria deriving from 
the statutory definition of QM best assure that consumers have a 
reasonable ability to repay their Seasoned QMs. With few exceptions, 
commenters did not raise issues about whether these criteria should be 
applied to Seasoned QMs and were supportive of their inclusion. As 
discussed above, in response to commenter requests the Bureau is 
revising and adopting comment 43(e)(7)(i)(A)-2 to clarify that Sec.  
1026.43(e)(7)(i)(A) does not prohibit a qualifying change that is 
entered into during or after a temporary payment accommodation in 
connection with a disaster or pandemic-related national emergency, even 
if the qualifying change involves a balloon payment or lengthened loan 
term.
    The Bureau declines to remove or adjust the requirement for 
Seasoned QMs to meet the points-and-fees cap as set out in Sec.  
1026.43(e)(2)(iii) of the General QM loan definition. Only one

[[Page 86425]]

commenter recommended that the points-and-fees cap be eliminated for 
Seasoned QMs, and the commenter did not provide supporting rationale or 
data. Changes recommended by a few commenters relate to a calculation 
methodology for points and fees that is beyond the scope of this rule. 
The Bureau also declines to revise the proposal to address the 
statutory prepayment penalty restrictions added separately by the Dodd-
Frank Act and codified in Sec.  1026.43(g).\139\ Those restrictions 
continue to apply in accordance with that section and are not affected 
by the addition of a Seasoned QM definition that includes a requirement 
for a seasoning period of at least 36 months.\140\
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    \139\ Dodd-Frank Act section 1414, adding TILA section 129C(c), 
15 U.S.C. 1639c(c).
    \140\ Pursuant to Sec.  1026.43(g)(1), a covered transaction 
must not include a prepayment penalty unless: (1) The prepayment 
penalty is otherwise permitted by law; and (2) the transaction: (A) 
has an annual percentage rate that cannot increase after 
consummation; (B) is a qualified mortgage under Sec.  1026.43(e)(2), 
(4), (5), (6), or (f); and (C) is not a higher-priced mortgage loan, 
as defined in Sec.  1026.35(a).
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    By incorporating the requirements of Sec.  1026.43(e)(2)(iv) and 
(v), this final rule implements the QM definition requirements in TILA 
section 129C(b)(2)(A)(iii) and (iv). TILA section 129C(b)(2)(A)(iii) 
includes a requirement for verifying and documenting the income and 
financial resources relied upon to qualify the obligors on the loan. 
For a fixed-rate QM, TILA section 129C(b)(2)(A)(iv) requires in part 
that the underwriting process take into account all applicable taxes, 
insurance, and assessments. The Bureau also finds that incorporation of 
the requirements in Sec.  1026.43(e)(2)(v) is authorized by TILA 
section 129C(b)(2)(A)(vi), which permits, but does not require, the 
Bureau to adopt guidelines or regulations relating to DTIs or 
alternative measures of ability to pay regular expenses after payment 
of total monthly debt.
    In the General QM Final Rule issued separately today, the Bureau 
modifies the requirements for General QMs relating to consideration of 
the consumer's DTI ratio or residual income, income or assets other 
than the value of the dwelling, and debts and verification of the 
consumer's income or assets other than the value of the dwelling and 
the consumer's debts. The Bureau is adopting those same requirements 
for Seasoned QMs in this final rule. As such, it should be clear that, 
in defining Seasoned QMs as a new category of QMs, the Bureau is not 
substituting performance requirements applicable during a seasoning 
period for the underwriting requirements applicable at or before 
consummation. Rather, the Bureau concludes that a sustained period of 
successful payments, combined with underwriting requirements and 
product restrictions, supports presuming that the creditor complied 
with ATR requirements at consummation and made loans that warrant QM 
status. Unlike other QM definitions that confer QM status upon 
consummation, though, the Seasoned QM definition confers QM status only 
after the consumer makes on-time payments, with limited exceptions, for 
at least 36 months.
    The Bureau continues to believe that sufficient consideration of a 
consumer's DTI ratio or residual income, income or assets other than 
the value of the dwelling, and debts is fundamental to any 
determination of ability to repay. Neither the General QM Final Rule 
nor this final rule requires that creditors apply specific DTI ratios 
or pricing thresholds in their underwriting criteria in order for their 
loans to be eligible for QM status. Stakeholders are encouraged to 
review the section-by-section analyses of Sec.  1026.43(e)(2)(v) and 
(v)(A) and (B) in the General QM Final Rule, as well as the regulatory 
text and accompanying commentary for those sections, for a more 
complete discussion of the consider and verify requirements as they are 
being incorporated in this final rule.
    The General QM Final Rule requires a creditor to consider the 
consumer's DTI ratio or residual income and to consider and verify the 
debt and income used to calculate DTI or residual income as part of the 
General QM loan definition. When this final rule and the General QM 
revisions take effect, creditors will no longer be required to consider 
and verify this information in accordance with complex rules set out as 
appendix Q to Regulation Z.\141\ Instead, to comply with the revised 
General QM consider requirements, a creditor is required to take into 
account income, assets, debt obligations, alimony, child support, and 
monthly DTI ratio or residual income in its ATR determination.
---------------------------------------------------------------------------

    \141\ See 12 CFR part 1026, appendix Q. The effective date of 
the General QM Final Rule is 60 days after publication in the 
Federal Register, although creditors will not have to comply with 
the revised requirements until July 1, 2021. The effective date of 
this final rule is discussed in part VII below.
---------------------------------------------------------------------------

    The revised General QM requirements do not prescribe how a creditor 
must take these factors into account, but a creditor must maintain 
written policies and procedures for how it takes into account the 
factors and retain documentation showing how it took into account the 
factors for a given loan. The General QM Final Rule also does not 
impose a particular standard or threshold applicable to the requirement 
that a creditor calculate and consider DTI or residual income, and it 
includes commentary to make clear that creditors have flexibility in 
how they consider income or assets, debt obligations, alimony, child 
support, and monthly DTI ratio or residual income.\142\ With the 
revisions made by the General QM Final Rule to the General QM loan 
definition, as adopted in the Seasoned QM definition, for purposes of 
determining the consumer's monthly DTI or residual income, the 
consumer's monthly payment on the covered transaction is calculated in 
accordance with Sec.  1026.43(e)(2)(iv).
---------------------------------------------------------------------------

    \142\ See comment 43(e)(2)(v)(A)-2 in the General QM Final Rule.
---------------------------------------------------------------------------

    Creditors are also required to verify income and debt consistent 
with the general ATR standard.\143\ Creditors will receive a safe 
harbor for compliance with the verification requirements if they comply 
with verification standards in manuals specified in the General QM 
Final Rule, as well as with revised versions of those manuals that are 
substantially similar.\144\ The General QM Final Rule also provides a 
safe harbor for compliance with the verification standards to creditors 
that ``mix and match'' the verification standards in the specified 
manuals. The General QM Final Rule discusses that permitting creditors 
to mix and match standards for verifying income, assets, debt 
obligations, alimony, and child support from each of the manuals would 
provide creditors with greater flexibility without undermining consumer 
protection. Further, in the General QM Final Rule, the Bureau 
encourages stakeholders, including groups of stakeholders, to develop 
additional verification standards that it could review for inclusion in 
the verification safe harbor.
---------------------------------------------------------------------------

    \143\ I.e., consistent with Sec.  1026.43(c)(3) (debt, alimony, 
and child support) and (4) (income and assets).
    \144\ The General QM Final Rule provides the verification safe 
harbor in connection with specified provisions of the GSE, FHA, VA, 
and USDA underwriting manuals.
---------------------------------------------------------------------------

    The Bureau's primary objective in providing the new Seasoned QM 
definition is to increase access to responsible and affordable credit 
by incentivizing the origination of non-QM loans for which creditworthy 
consumers have an ability to repay, but that may not otherwise be 
eligible for QM status for various reasons. The Bureau notes that the 
proposal included proposed

[[Page 86426]]

comment 43(e)(7)(i)(B)-1 as a possible clarification that a loan that 
complies with the consider and verify requirements of any other QM 
definition also would have complied with the consider and verify 
requirements in the Seasoned QM definition. In the proposal the Bureau 
also requested comment on whether the final rule should cross-reference 
the consider and verify requirements for General QMs on which the 
General QM Proposal had requested comment. For the reasons discussed 
above, this final rule adopts the revised General QM consider and 
verify requirements, which the Bureau expects will facilitate 
consistent use in connection with Seasoned QMs, so the Bureau is not 
finalizing proposed comment 43(e)(7)(i)(B)-1.

43(e)(7)(i)(C) and (D)

    The Bureau proposed Sec.  1026.43(e)(7)(i)(C) to include in the 
Seasoned QM criteria that covered transactions would have to meet 
certain performance requirements set out in detail in Sec.  
1026.43(e)(7)(ii). The Bureau proposed Sec.  1026.43(e)(7)(i)(D) to 
include in the Seasoned QM criteria that covered transactions would 
also have to meet certain portfolio requirements set out in detail in 
Sec.  1026.43(e)(7)(iii).
    The Bureau adopts Sec.  1026.43(e)(7)(i)(C) and (D) as proposed. 
The Bureau discusses the final performance requirements and related 
public comments more fully in the section-by-section analysis of Sec.  
1026.43(e)(7)(ii) below. The Bureau discusses the final portfolio 
requirements and related public comments more fully in the section-by-
section analysis of Sec.  1026.43(e)(7)(iii) below.

43(e)(7)(i)(E)

    Prior to the enactment of the Dodd-Frank Act, HOEPA amended TILA to 
add a prohibition against originating a high-cost mortgage without 
regard to a consumer's repayment ability, as more specifically set out 
in TILA section 129(h).\145\ The Dodd-Frank Act created a new ATR 
requirement for mortgage loans within TILA, as discussed above, but did 
not amend the HOEPA ability-to-repay provision relating specifically to 
high-cost mortgages. Regulation Z currently defines high-cost mortgage 
\146\ and implements the HOEPA ability-to-repay requirement for closed-
end high-cost mortgages by providing that a creditor must comply with 
the ATR/QM Rule's repayment ability requirements set forth in Sec.  
1026.43.\147\ The proposal did not explicitly address whether Seasoned 
QM status would extend to high-cost mortgages subject to HOEPA, but the 
Bureau is adding Sec.  1026.43(e)(7)(i)(E) to clarify that it does not.
---------------------------------------------------------------------------

    \145\ 15 U.S.C. 1639(h).
    \146\ Under 12 CFR 1026.32(a), there are several ways that a 
loan secured by the consumer's principal dwelling can be a high-cost 
mortgage subject to HOEPA. One is if the APR exceeds the relevant 
APOR by a specific amount, which is 6.5 percentage points for most 
first-lien mortgages. The other ways relate to points and fees and 
prepayment penalties. 12 CFR 1026.32(a)(1).
    \147\ 12 CFR 1026.34(a)(4) (exempting temporary or ``bridge'' 
loans with terms of twelve months or less from this requirement).
---------------------------------------------------------------------------

    Three consumer advocate commenters noted that the proposal did not 
explicitly address whether Seasoned QM status would extend to high-cost 
mortgages subject to HOEPA. These commenters also asserted that the 
Bureau had not made the necessary case to restrict remedies under HOEPA 
for violations of HOEPA's ability-to-repay requirement.
    The Bureau's purpose in this rulemaking is not to change the 
ability-to-repay requirement under HOEPA, which governs high-cost 
mortgages that constitute a very small percentage of the overall 
mortgage market.\148\ Although HOEPA gives the Bureau the authority to 
make certain exemptions from HOEPA's requirements,\149\ the Bureau has 
not sought to use that authority in this rulemaking. To clarify the 
scope of the final rule, the Bureau is adding Sec.  
1026.43(e)(7)(i)(E), which excludes high-cost mortgages as defined in 
Sec.  1026.32(a) from the Seasoned QM definition.
---------------------------------------------------------------------------

    \148\ According to HMDA data, there were only 6,507 HOEPA loans 
total originated in 2019, and many of those loans would be 
ineligible for seasoning even if they were not subject to HOEPA due 
to other features (for example, because they have an adjustable rate 
or are secured by a subordinate lien). Bureau of Consumer Fin. 
Prot., Data Point: 2019 Mortgage Market Activity and Trends at 55 
(June 2020), https://files.consumerfinance.gov/f/documents/cfpb_2019-mortgage-market-activity-trends_report.pdf.
    \149\ 15 U.S.C. 1639(p)(1) (authorizing the Bureau to make 
certain exemptions from HOEPA's requirements, if the Bureau finds 
that the exemption ``is in the interest of the borrowing public'' 
and ``will apply only to products that maintain and strengthen home 
ownership and equity protection'').
---------------------------------------------------------------------------

43(e)(7)(ii) Performance Requirements

    Proposed Sec.  1026.43(e)(7)(ii) set forth the following proposed 
performance criteria that a covered transaction must meet to be a 
Seasoned QM under proposed Sec.  1026.43(e)(7): the covered transaction 
must have no more than two delinquencies of 30 or more days and no 
delinquencies of 60 or more days at the end of the seasoning period. In 
the proposal, the Bureau tentatively concluded that the proposed 
standard for the number and duration of delinquencies would strike the 
appropriate balance of allowing flexibility for issues unrelated to a 
consumer's repayment ability while treating payment histories that more 
clearly signal potential issues with ability to repay as disqualifying. 
It also noted that the proposed performance standards would be 
consistent with the GSEs' representation and warranty framework and the 
master policies of mortgage insurers, which reflect market experience. 
For the reasons set forth below, the Bureau adopts in the final rule 
these performance criteria as proposed.

Comments Received

    The Bureau received a number of comments on the proposed 
performance criteria, expressing a variety of views. Among the 
commenters that supported the proposed performance criteria, several 
industry commenters and consumer advocate commenters expressed support 
for how the proposed criteria would be consistent with the GSEs' 
representation and warranty framework. Another industry commenter 
agreed with the Bureau's tentative conclusion that the proposed limits 
on the number of delinquencies during the seasoning period 
appropriately balanced the need to limit the Seasoned QM safe harbor to 
loans with strong evidence of a consumers' ability to repay and the 
practical reality that some brief delinquencies do not indicate the 
consumer lacks the ability to repay. Additionally, some industry 
commenters joined several consumer advocate groups to urge the Bureau 
not to loosen the criteria in a final rule. Further, an industry 
commenter expressed general support for limiting the seasoning pathway 
to QM status to loans with three years of performance with minor 
delinquencies.\150\
---------------------------------------------------------------------------

    \150\ This commenter asked the Bureau to clarify that certain 
delinquencies during the seasoning period are not counted for 
purposes of the performance criteria if they occur during or 
immediately preceding periods of forbearance. Several other industry 
commenters also suggested adjustments to the proposed definitions of 
delinquency, qualifying change, and temporary payment accommodation 
extended in connection with a disaster or pandemic-related national 
emergency. These comments are addressed in the section-by-section 
analysis of Sec.  1026.43(e)(7)(iv)(A), (B), and (D) below.
---------------------------------------------------------------------------

    With respect to commenters that did not support the criteria as 
proposed, several industry commenters asked the Bureau to increase the 
number of permissible 30-day delinquencies. An industry commenter 
suggested that the Bureau could increase the number of 30-day 
delinquencies to three or four because the Bureau's own analysis in

[[Page 86427]]

the proposal showed that such an increase would have modest effects on 
the number of loans that would season while providing for additional 
flexibility during the seasoning period. Another industry commenter 
asserted that increasing the number of permissible 30-day delinquencies 
to three would benefit consumers whose jobs involve travel and who may 
miss payments because they have limited access to technology on job-
rated travel. Several industry commenters urged the Bureau to increase 
the number of permissible 30-day delinquencies to three or four, 
asserting that such increase would accommodate consumers who need 
additional flexibility due to the COVID-19 pandemic's negative economic 
impacts. One industry commenter argued that there should be no 
restriction on the number of delinquencies as long as a consumer cures 
them before the end of the seasoning period.
    On the other hand, two consumer advocate commenters expressed the 
concern that the proposed performance criteria would not be restrictive 
enough. They stated that the Bureau should clarify that rolling 
delinquencies (i.e., certain delinquencies that continue month after 
month) would not be permitted. They also suggested that the Bureau 
revise the proposed performance standards to limit permissible late 
payments to no more than two payments outside of a loan's grace period.
    Lastly, an industry commenter suggested that the Bureau undertake 
additional research to examine the risks of aligning the proposed 
performance standards with the existing GSE representation and warranty 
framework. It stated that it believes a careful market analysis must be 
done to consider empirical evidence of minor and severe delinquencies 
which later cure and that the Bureau and industry must understand the 
unintended consequences of potentially altered borrower behavior with a 
seasoning approach to QMs.

The Final Rule

    The Bureau is adopting the performance standards as proposed. Final 
Sec.  1026.43(e)(7)(ii) is adopted based on the legal authorities 
discussed in the section-by-section analysis of Sec.  1026.43(e)(7)(i) 
above.
    As explained in the proposal, the Bureau considered the existing 
practices of the GSEs and mortgage insurers in developing the 36-month 
period for successful payment history. As described in part V, each GSE 
generally provides creditors relief from its enforcement with respect 
to certain representations and warranties a creditor must make to the 
GSE regarding its underwriting of a loan. The GSEs generally provide 
creditors that relief after the first 36 monthly payments if the 
borrower had no more than two 30-day delinquencies and no delinquencies 
of 60 days or more. Similarly, the master policies of mortgage insurers 
generally provide that the mortgage insurer will not issue a rescission 
with respect to certain representations and warranties made by the 
originating lender if the borrower had no more than two 30-day 
delinquencies in the 36 months following the borrower's first payment, 
among other requirements.\151\
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    \151\ Fannie Mae, Amended and Restated GSE Rescission Relief 
Principles for Implementation of Master Policy Requirement #28 
(Rescission Relief/Incontestability) (Sept. 10, 2018), https://singlefamily.fanniemae.com/media/16331/display.
---------------------------------------------------------------------------

    The Bureau recognizes that the payment history conditions laid out 
in the GSEs' representation and warranty framework and the mortgage 
insurers' master policies reflect market experience. Consistent with 
the GSEs' representation and warranty framework and the master policies 
of mortgage insurers, the final rule provides that more than two 
delinquencies of 30 days or more during the seasoning period or any 
delinquency of 60 days or more disqualifies a covered transaction from 
being a Seasoned QM under Sec.  1026.43(e)(7).\152\
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    \152\ As discussed in the proposal and in part VIII below, the 
Bureau considered alternative seasoning periods and alternative 
performance requirements of allowable 30-day delinquencies. Each of 
the alternatives permits no 60-day delinquencies. The analysis of 
alternatives found that varying the number of allowable 30-day 
delinquencies could have some impact on foreclosure risk, even 
though the Bureau also found that varying the length of the 
seasoning period may have a greater impact.
---------------------------------------------------------------------------

    The Bureau concludes that the number and duration of delinquencies 
set forth in the performance criteria requirement strike the best 
balance between allowing flexibility for issues unrelated to a 
consumer's repayment ability (e.g., a missed payment due to vacation or 
to a mix-up over automatic withdrawals) and treating payment histories 
that more clearly signal potential issues with ability to repay as 
disqualifying. The Bureau disagrees with the industry commenter who 
suggested that there should be no restrictions on the number of 
delinquencies as long as a consumer cures them before the end of the 
seasoning period. The Bureau concludes that the ability of consumers to 
consistently make timely payments in accordance with a mortgage loan's 
terms is an important indication of the consumer's ability to repay. 
The Bureau also declines to increase the number of permissible 30-day 
delinquencies, because it concludes that market experience, as 
reflected through the GSEs' representation and warranty framework and 
the master policies of mortgage insurers, strongly suggests that if a 
loan has more than two 30-day delinquencies in a 36-month period, it 
may indicate issues related to the underwriting of the loan. For the 
same reason, the Bureau also declines to adopt delinquency and 
performance standards that are based on a loan's grace period, as 
suggested by some consumer advocate commenters. The Bureau has decided 
to base the definition of delinquency for purposes of Sec.  
1026.43(e)(7) on the date that payment becomes due, even if the 
consumer is afforded a period after the due date to pay before the 
servicer assesses a late fee.
    The Bureau's adoption of the performance criteria as proposed is 
also informed by its analysis of potential impacts if the number of 
permissible 30-day delinquencies were increased from two to three or 
four 30-day delinquencies. As discussed in more detail in part VIII 
below, the Bureau concluded that in light of the General QM Final Rule, 
there would be little benefit in terms of access to credit from 
increasing the number of permissible 30-day delinquencies, while there 
would be some negative impact in the form of increased foreclosure 
risk. The Bureau noted that increasing the number of allowable 30-day 
delinquencies by one increases the relative foreclosure start rate 
\153\ between Seasoned QMs and loans that were safe harbor QM loans at 
consummation by approximately 4 percent.
---------------------------------------------------------------------------

    \153\ The term ``foreclosure start rate'' used in this final 
rule refers to the rate at which mortgage loans first entered into 
any one of the following: Foreclosure proceeding, deed in lieu of 
foreclosure, foreclosure, voluntary surrender, or repossession, as 
tracked by the NMDB.
---------------------------------------------------------------------------

    Further, with respect to commenters who suggested that the Bureau 
increase the number of permissible 30-day delinquencies to accommodate 
consumers who need additional flexibility due to the COVID-19 
pandemic's economic impacts, the Bureau concludes that the final rule's 
exclusion of periods of temporary payment accommodation due to a 
disaster or pandemic-related national emergency from the seasoning 
period pursuant to Sec.  1026.43(e)(7)(iv)(C)(2) will

[[Page 86428]]

be sufficient in providing such requested flexibility.\154\
---------------------------------------------------------------------------

    \154\ The exclusion of any period during which the consumer is 
in a temporary payment accommodation extended in connection with a 
disaster or pandemic-related national emergency from the seasoning 
period is discussed more fully in the section-by-section analysis of 
Sec.  1026.43(e)(7)(iv)(C)(2).
---------------------------------------------------------------------------

    Lastly, the Bureau notes that the proposal would have not 
permitted, and the final rule does not permit, rolling delinquencies of 
30 days or more. As further discussed in the section-by-section 
analysis of Sec.  1026.43(e)(7)(iv)(A) below, a periodic payment is 60 
days delinquent under this final rule if the consumer is more than 30 
days delinquent on the first of two sequential scheduled periodic 
payments and does not make both sequential scheduled periodic payments 
before the due date of the next scheduled periodic payment after the 
two sequential scheduled periodic payments. Under the delinquency 
definition in Sec.  1026.43(e)(7)(iv)(A) and the performance 
requirements in Sec.  1026.43(e)(7)(ii), a loan could not season if, 
for example, a consumer was 30 days or more delinquent on a monthly 
periodic payment due on January 1 and subsequently failed to make both 
the periodic payment due on January 1 and the periodic payment due on 
February 1 before March 1. In this example, if the consumer made the 
January 1 periodic payment on February 5, but did not make the payment 
due on February 1 by March 1, the loan would be considered 60 days 
delinquent as of March 1 and therefore would not be eligible to become 
a Seasoned QM. Rolling delinquencies of 30 days or more are therefore 
not permitted under this final rule due to a combination of the 
definition of delinquency for purposes of the rule and the prohibition 
on any delinquencies of 60 days or more.

43(e)(7)(iii) Portfolio Requirements

    Proposed Sec.  1026.43(e)(7)(iii) set forth certain proposed 
portfolio requirements for a covered transaction to be a Seasoned QM. 
It provided that to be a Seasoned QM, the loan must satisfy the 
following requirements. First, at consummation, the loan must not have 
been subject to a commitment to be acquired by another person. Second, 
legal title to the loan could not be sold, assigned, or otherwise 
transferred to another person before the end of the seasoning period, 
except in circumstances specified in proposed Sec.  
1026.43(e)(7)(iii)(B)(1) and (2). Proposed Sec.  
1026.43(e)(7)(iii)(B)(1) provided that the loan may be sold, assigned, 
or otherwise transferred to another person pursuant to a capital 
restoration plan or other action under 12 U.S.C. 1831o; actions or 
instructions of any person acting as conservator, receiver, or 
bankruptcy trustee; an order of a State or Federal government agency 
with jurisdiction to examine the creditor pursuant to State or Federal 
law; or an agreement between the creditor and such an agency. Proposed 
Sec.  1026.43(e)(7)(iii)(B)(2) provided that the loan may be sold, 
assigned, or otherwise transferred pursuant to a merger of the creditor 
with another person or acquisition of the creditor by another person or 
of another person by the creditor.
    The Bureau also proposed to add comments 43(e)(7)(iii)-1 through -3 
to clarify the proposed portfolio requirement. Proposed comment 
43(e)(7)(iii)-1 would have explained that a loan is not eligible to 
season into a QM under proposed Sec.  1026.43(e)(7) if legal title to 
the debt obligation is sold, assigned, or otherwise transferred to 
another person before the end of the seasoning period, unless one of 
the exceptions in proposed Sec.  1026.43(e)(7)(iii)(B) applies. 
Proposed comment 43(e)(7)(iii)-2 would have clarified the application 
of proposed Sec.  1026.43(e)(7)(iii) to subsequent transferees. 
Proposed comment 43(e)(7)(iii)-3 would have explained the impact of 
supervisory sales. For the reasons discussed below, the Bureau adopts 
proposed Sec.  1026.43(e)(7)(iii) and comments 43(e)(7)(iii)-1 through 
-3 with changes that allow a single transfer during the seasoning 
period provided that certain requirements are met, as discussed below.

Comments Received

    Consumer advocate commenters and some industry commenters supported 
the proposed portfolio requirement and agreed with the Bureau's 
rationale that the proposed requirement would provide an important 
incentive for creditors to make diligent ATR determinations at 
origination. Some consumer advocate commenters supported adopting the 
proposed portfolio requirement as proposed to mitigate some of the 
risks they anticipated in a Seasoned QM final rule.
    However, various industry commenters and a United States senator 
opposed the proposed portfolio requirement. They asserted that it would 
reduce the number of loans eligible to season and, as such, diminish 
the potential of the final rule to lower mortgage prices and increase 
market liquidity. They also asserted that the requirement would create 
an unfair playing field, disadvantaging non-bank lenders that rely on 
warehouse lending and secondary market sales for liquidity. Several 
commenters asserted that loan performance is sufficiently probative of 
a consumer's ability to repay even without a portfolio requirement, and 
some suggested that the Bureau has not shown why the fact that a loan 
is held in portfolio is evidence that the consumer had the ability to 
repay the loan at consummation. Commenters also asserted that other 
factors would sufficiently ensure responsible lending by creditors, 
including the following: the proposed product restrictions and 
underwriting requirements for Seasoned QMs; the interagency credit risk 
retention rule; due diligence performed by loan aggregators; and 
originators' concerns about indemnification and reputational risks that 
result if the loans they sell to third parties fail. One industry 
commenter asserted that if the final rule is limited to portfolio 
lenders, non-QM mortgage lending is likely to become dominated by 
portfolio lenders, which would lead to a system that is less 
diversified and in which risk is concentrated in certain market 
segments.
    An industry trade association and another industry commenter 
proposed broadening the portfolio requirement to include a one-time 
sale by the creditor to a third-party purchaser that then holds the 
loan for the requisite 36-month seasoning period. They asserted that a 
whole loan sale model as they described is considerably less risky than 
a securitization model for several reasons. Specifically, they noted 
that, as compared to investors in mortgage-backed securities, whole 
loan purchasers have a more direct relationship with the originator, 
are better positioned to understand and evaluate a loan's underlying 
fundamentals, and have strong incentives to be prudent as they own all 
of the credit risk. One industry commenter also sought to broaden the 
list of proposed exceptions to the portfolio requirement to permit 
transfers pursuant to a creditor's default or breach of loan covenants 
in situations where the loan serves as collateral securing the 
financing the creditor uses to fund the loan.
    Meanwhile, an academic commenter asserted that the proposed 
portfolio requirement would be substantially weaker than the EGRRCPA's 
portfolio requirement because the proposal lacked the same resale 
restrictions that Congress established in the EGRRCPA. Moreover, the 
commenter asserted that the proposal did not contain evidence to

[[Page 86429]]

support the Bureau's assertion that the proposed requirement would make 
creditors underwrite mortgages more carefully. An industry commenter 
referenced a study by the Board in which researchers found that large 
lenders were more apt to reduce quality and receive government bailouts 
in the 2008 financial crisis. This commenter expressed concern that the 
proposed portfolio requirement may not be sufficient to incentivize 
large banks to engage in responsible lending because banks that are 
deemed too-big-to-fail do not face sufficient negative consequences if 
loans they hold in portfolio fail.
    Lastly, several industry commenters expressed concern that mortgage 
loans that bank creditors pledge as collateral to the Federal Home Loan 
Banks or the Board may not meet the proposed portfolio requirement and 
sought clarification or confirmation that such pledged loans are deemed 
to be held in the bank creditors' portfolios.

The Final Rule

    Under the proposal, for a covered transaction to become eligible 
for Seasoned QM status, the creditor that originates the transaction 
would have to hold the transaction in its portfolio, unless one of two 
exceptions, set forth in proposed Sec.  1026.43(e)(7)(iii)(B)(1) 
(transfers of ownership pursuant to certain supervisory sales) or Sec.  
1026.43(e)(7)(iii)(B)(2) (transfers of ownership pursuant to certain 
mergers or acquisitions), applied. Proposed Sec.  
1026.43(e)(7)(iii)(B)(1) and (2) are adopted as proposed.
    However, the Bureau is adopting in Sec.  1026.43(e)(7)(iii)(B)(3) 
an additional exception, which provides that the covered transaction 
may be sold, assigned, or otherwise transferred once before the end of 
the seasoning period, so long as the covered transaction is not 
securitized as part of the sale, assignment, or transfer or at any 
other time before the end of the seasoning period. In light of this 
change, this final rule makes a related change to proposed Sec.  
1026.43(e)(7)(iii)(A) to provide that Sec.  1026.43(e)(7)(iii)(B)(3) is 
an exception to the general prohibition against subjecting the covered 
transaction, at consummation, to a commitment to be acquired by another 
person to become a Seasoned QM under Sec.  1026.43(e)(7). Conforming 
changes are also made to proposed comments 43(e)(7)(iii)-1 through -3 
in light of the adoption of Sec.  1026.43(e)(7)(iii)(B)(3).
    The exception in Sec.  1026.43(e)(7)(iii)(B)(3) may only be used 
one time for a covered transaction during the seasoning period. This 
means that until the end of the seasoning period, a purchaser that 
acquires the covered transaction pursuant to Sec.  
1026.43(e)(7)(iii)(B)(3) may not subsequently transfer the covered 
transaction to any other entity and maintain the covered transaction's 
eligibility to become a Seasoned QM, except that the purchaser may 
transfer the covered transaction pursuant to Sec.  
1026.43(e)(7)(iii)(B)(1) or (2). Section 1026.43(e)(7)(iii)(B)(3) also 
provides that the covered transaction may not be securitized as part of 
a transfer permitted under Sec.  1026.43(e)(7)(iii)(B)(3) or at any 
other time before the end of the seasoning period. For an illustrative 
example, a covered transaction is considered to be securitized under 
this final rule if it is transferred to an entity such as a 
securitization trust, and interests in the trust are held by investors, 
even if legal title to the covered transaction is retained by the 
securitization trust.
    As noted in the discussion of comments received on the proposed 
portfolio requirement, two industry commenters suggested the Bureau 
permit a one-time sale of the covered transaction to another purchaser 
as long as the owner or purchaser holds the covered transaction in its 
portfolio for the requisite 36-month seasoning period and does not 
securitize the covered transaction. The Bureau has concluded that a 
one-time transfer of a whole loan should not preclude the loan from 
becoming a Seasoned QM for the following reasons. First, a fundamental 
goal of creating the Seasoned QM category is to encourage creditors to 
increase the origination of non-QM loans in a responsible manner. Many 
creditors, particularly non-banks, rely on borrowed funds to make loans 
and then sell these loans in order to originate additional new loans. 
Further, non-banks are particularly active in the non-QM market, with 
only one depository institution included among the 10 largest non-QM 
originators.\155\ Allowing a one-time transfer as permitted in this 
final rule broadens the category of responsible, non-QM originations 
that could benefit from this final rule to include loans made by such 
creditors and thus furthers the Bureau's goal of increasing such 
originations. Additionally, the Bureau notes that non-banks play a key 
role in expanding access to credit as evidenced by the lower average 
FICO scores and higher DTIs associated with their loans as compared to 
depositories.\156\
---------------------------------------------------------------------------

    \155\ Inside Mortg. Fin., Top Originators of Securitized 
Expanded-Credit Mortgages: 2019-3Q20, https://www.insidemortgagefinance.com/products/300059-top-originators-of-securitized-expanded-credit-mortgages-2019-3q20-pdf (last visited 
Nov. 19, 2020). The only depository institution included amongst the 
10 largest non-QM originators is JPMorgan Chase.
    \156\ Urban Inst., Housing Finance at a Glance, at 17-18, (Oct. 
2020), https://www.urban.org/sites/default/files/publication/103123/october-chartbook-2020_2.pdf.
---------------------------------------------------------------------------

    Second, while allowing a single transfer may mean that the 
originating creditor has a somewhat weaker incentive to originate 
affordable loans, relative to the proposal, the Bureau concludes that 
requiring the purchaser of the covered transaction to hold the 
transaction in its portfolio until the end of the seasoning period will 
ensure that the originating creditor and the purchaser together have 
sufficient incentive to ensure that the originating creditor makes a 
diligent ATR determination. The whole-loan transfer puts the purchaser 
in a similar position to the original creditor in the legal and credit 
exposure the purchaser faces if a consumer defaults on the covered 
transaction. As such, to the extent that all or part of the seasoning 
period remains after the transfer, the purchaser will have an incentive 
to ensure the loan is high quality, which in turn will incentivize the 
creditor to make a diligent ATR determination at consummation.
    One of the industry commenters that suggested the single transfer 
exception indicated that, as part of the exception, the Bureau could 
specifically require the purchaser to hold the loan for 36 months after 
the date of transfer. The type of transfers that Sec.  
1026.43(e)(7)(iii)(B)(3) permits commonly occur before or around the 
due date for the first periodic payment. For such transactions, Sec.  
1026.43(e)(7)(iii) as finalized requires the purchaser to hold the loan 
in portfolio for approximately 36 months after the date of transfer, 
because Sec.  1026.43(e)(7)(iv)(C) provides that the seasoning period 
does not end until at least 36 months after the due date for the first 
periodic payment. Additionally, as the proposal explained, given the 
increasing likelihood that intervening events contribute to 
delinquencies, the Bureau generally does not view delinquency after 36 
months in the lifecycle of a loan product as undermining the 
presumption of creditor compliance with the ATR requirements at 
consummation. In light of these considerations, and the incentives 
discussed above that the initial 36-month seasoning period creates for 
the originating creditor and the purchaser, the Bureau has determined 
it is unnecessary to extend

[[Page 86430]]

or reset the seasoning period for loans transferred after the first 
payment date pursuant to Sec.  1026.43(e)(7)(iii)(B)(3) to include a 
period of 36 months beginning on the date of the transfer.
    The Bureau concludes that it is appropriate to exclude loans that 
are securitized because it recognizes whole loan purchasers will likely 
have a more direct relationship with the originator than investors in 
mortgage-backed securities and may therefore have more visibility into 
the seller's underwriting process and be better positioned to use 
remedies to make the originating creditor buy back the loan if the loan 
performs poorly or is otherwise defective. The Bureau believes that a 
whole loan purchaser's incentive remains regardless of whether there is 
a mandatory commitment between the seller and purchaser to deliver a 
mortgage loan at a predetermined price by a specified date. Even in the 
case of mandatory commitments, the seller has an obligation to deliver 
the loan in accordance with the investor requirements and in compliance 
with applicable State and Federal requirements. The Bureau acknowledges 
that purchasers are often incentivized to preserve their business 
relationship by attempting to cure loan defects without requiring the 
seller to repurchase the loan. However, in the event of a material and 
uncurable defect, purchasers can and do exercise remedies requiring the 
seller to repurchase the loan, rather than assume the liability of a 
non-compliant loan or retain a defective loan in portfolio that they 
anticipate will perform worse than expected.
    The Bureau declines to adopt a final rule without any portfolio 
requirement, as a number of industry commenters urged the Bureau to do. 
As discussed in greater detail in the section-by-section analysis of 
Sec.  1026.43(e)(7)(i) above, the final rule does not impose a DTI 
limit or a pricing limit on loans that are eligible to become Seasoned 
QMs. In this respect, the Seasoned QM definition is similar to some 
other QM definitions such as the Small Creditor QM definition. While 
covered transactions are subject to certain product restrictions, 
limitations on points and fees, and underwriting requirements, in the 
absence of a specific DTI or pricing limit applicable at consummation, 
the Bureau has decided to impose a portfolio requirement to help ensure 
the creditor makes a reasonable determination that the loan is within 
the consumer's ability to repay. As discussed above, it is conceivable 
that under certain circumstances, the record of a consumer's payments 
could make it appear that the consumer had the ability to repay at 
consummation even when that is not in fact the case. Other provisions 
of this final rule attempt to reduce that possibility (such as by 
providing that payments made by a servicer or from a consumer's 
escrowed funds are not considered as on-time payments), but the Bureau 
has decided to provide further assurance that the creditor's ATR 
determination at consummation was a diligent and reasonable one by 
including a portfolio requirement.
    Further, although the Bureau recognizes that the interagency credit 
risk retention rule \157\ provides an indirect incentive to originate 
responsible and affordable loans for sale and securitization in the 
secondary markets, the Bureau concludes that limiting the Seasoned QM 
definition to loans that are held in portfolio by the originating 
creditor or first purchaser will provide stronger incentives to 
originate responsible and affordable loans.
---------------------------------------------------------------------------

    \157\ The QM definition is related to the definition of 
qualified residential mortgage (QRM). Section 15G of the Securities 
Exchange Act of 1934, added by section 941(b) of the Dodd-Frank Act, 
generally requires the securitizer of asset-backed securities (ABS) 
to retain not less than 5 percent of the credit risk of the assets 
collateralizing the ABS. 15 U.S.C. 78o-11. Six Federal agencies (not 
including the Bureau) are tasked with implementing this requirement. 
Those agencies are the Board, the OCC, the FDIC, the Securities and 
Exchange Commission, the FHFA, and HUD (collectively, the QRM 
agencies). Section 15G of the Securities Exchange Act of 1934 
provides that the credit risk retention requirements shall not apply 
to an issuance of ABS if all of the assets that collateralize the 
ABS are QRMs. See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B). 
Section 15G requires the QRM agencies to jointly define what 
constitutes a QRM, taking into consideration underwriting and 
product features that historical loan performance data indicate 
result in a lower risk of default. See 15 U.S.C. 78o-11(e)(4). 
Section 15G also provides that the definition of a QRM shall be ``no 
broader than'' the definition of a qualified mortgage, as the term 
is defined under TILA section 129C(b)(2), as amended by the Dodd-
Frank Act, and regulations adopted thereunder. 15 U.S.C. 78o-
11(e)(4)(C). In 2014, the QRM agencies issued a final rule adopting 
the risk retention requirements. 79 FR 77601 (Dec. 24, 2014). The 
final rule aligns the QRM definition with the QM definition defined 
by the Bureau in the ATR/QM Rule, effectively exempting securities 
comprised of loans that meet the QM definition from the risk 
retention requirement. The final rule also requires the agencies to 
review the definition of QRM no later than four years after the 
effective date of the final risk retention rules. In 2019, the QRM 
agencies initiated a review of certain provisions of the risk 
retention rule, including the QRM definition, and have extended the 
review period until June 20, 2021. 84 FR 70073 (Dec. 20, 2019). 
Among other things, the review allows the QRM agencies to consider 
the QRM definition in light of any changes to the QM definition 
adopted by the Bureau.
---------------------------------------------------------------------------

    Moreover, while not necessary for the Bureau's conclusion to retain 
a portfolio requirement, that conclusion is consistent with the 
Bureau's analysis of the foreclosure start rates of mortgage loans 
originated between 2003 and 2015 that were designated to be held in 
portfolio at origination and mortgage loans originated during the same 
time period that were designated for private-label securitization. The 
loans the Bureau evaluated had fixed interest rates, were first-lien 
transactions, were not high-cost mortgages subject to HOEPA, and did 
not have any features that disqualified them from being QMs. The 
results are shown in Figure 1 below.

[[Page 86431]]

[GRAPHIC] [TIFF OMITTED] TR29DE20.400

    Figure 1 shows that loans designated to be held in portfolio at 
origination consistently foreclosed at lower rates for eight of the 13 
years that made up the period of time that the Bureau evaluated, from 
2003 through 2010. Although the foreclosure start rates in the years 
2011 through 2015 of loans designated to be held in portfolio and loans 
designated for private-label securitization appear to be similar, the 
number of such securitized loans during those years is too small to be 
informative.\158\ These data further support the Bureau's determination 
that creditors are more likely to do diligent ATR determinations when 
loans are held in portfolio rather than securitized.
---------------------------------------------------------------------------

    \158\ The numbers of loans designated for private-label 
securitization from 2011 through 2015 that met the criteria 
described above (i.e., non-HOEPA, first-lien, fixed-rate loans that 
did not have features that would make them ineligible to be QMs) 
were as follows: 9,700, 17,500, 25,720, 22,900, and 16,800. In 
contrast, the numbers of loans designated to be held in portfolio 
during those years and that met the same criteria were between 1.4 
and 2.2 million.
---------------------------------------------------------------------------

    The Bureau also declines to create an additional exception in Sec.  
1026.43(e)(7)(iii) to permit transfers pursuant to a creditor's default 
or breach of loan covenants in situations in which the loan serves as 
collateral securing the financing the creditor uses to fund the loan, 
as one industry commenter requested. Such transfers may fall within the 
single-transfer exception in Sec.  1026.43(e)(7)(iii)(B)(3) if the 
requirements for that exception are met, and the Bureau concludes an 
additional exception for circumstances involving default or breach of 
loan covenants is not warranted.
    Lastly, the Bureau has decided that no change to the proposal is 
required to address whether loans pledged as collateral to the Federal 
Home Loan Banks or the Board are deemed to be held in the bank 
creditors' portfolios for purposes of the Seasoned QM portfolio 
requirement. Whether a given covered transaction meets the portfolio 
requirement depends generally on (1) whether the transaction is 
subject, at consummation, to a commitment to be acquired by another 
person and (2) whether legal title is sold, assigned, or otherwise 
transferred to another person before the end of the seasoning period, 
outside of the specified exceptions. This general test is modeled on 
the test set forth in the Small Creditor QM and Balloon Payment QM 
definitions, and, as explained above, the Bureau has also added a 
single-transfer exception to the Seasoned QM portfolio requirement if 
the standards articulated above are met. If loans pledged to the 
Federal Home Loan Banks or the Board comply with the general test or 
comply with any of the three specified exceptions set forth in Sec.  
1026.43(e)(7)(iii)(B), then they are considered to be held in portfolio 
until the end of the seasoning period pursuant to Sec.  
1026.43(e)(7)(iii).

43(e)(7)(iv) Definitions

    The Bureau proposed to adopt several definitions for purposes of 
proposed Sec.  1026.43(e)(7). The Bureau solicited comments on all of 
its proposed definitions. The Bureau addresses each of the proposed 
definitions in turn below.

Paragraph 43(e)(7)(iv)(A)

    As explained above, Sec.  1026.43(e)(7)(i)(C) and (ii) as finalized 
provides that only covered transactions that have no more than two 
delinquencies of 30 or more days and no delinquencies of 60 or more 
days at the end of the seasoning period can become Seasoned QMs. 
Proposed Sec.  1026.43(e)(7)(iv)(A) would have defined delinquency as 
the failure to

[[Page 86432]]

make a periodic payment (in one full payment or in two or more partial 
payments) sufficient to cover principal, interest, and, if applicable, 
escrow by the date the periodic payment is due under the terms of the 
legal obligation. The proposed definition in Sec.  1026.43(e)(7)(iv)(A) 
would have excluded other amounts, such as late fees, from the 
definition. Proposed Sec.  1026.43(e)(7)(iv)(A)(1) through (5) would 
have addressed additional, specific aspects of the definition of 
delinquency, which are discussed in the section-by-section analyses 
that follow. Proposed comment 43(e)(7)(iv)(A)-1 would have clarified 
that, in determining whether a scheduled periodic payment is delinquent 
for purposes of proposed Sec.  1026.43(e)(7), the due date is the date 
the payment is due under the terms of the legal obligation, without 
regard to whether the consumer is afforded a period after the due date 
to pay before the servicer assesses a late fee.
    Industry commenters generally supported proposed Sec.  
1026.43(e)(7)(iv)(A), while consumer advocate commenters opposed the 
Seasoned QM Proposal as a whole. Both industry and consumer advocate 
commenters raised concerns about specific aspects of the definition 
that are discussed in the section-in-section analyses of Sec.  
1026.43(e)(7)(iv)(A)(1), (2), and (4) below. The Bureau did not receive 
comments on proposed comment 43(e)(7)(iv)(A)-1.
    The Bureau concludes that the definition of delinquency in Sec.  
1026.43(e)(7)(iv)(A) provides a clear method of assessing delinquency 
for purposes of Sec.  1026.43(e)(7). Accordingly, the Bureau is 
finalizing Sec.  1026.43(e)(7)(iv)(A) and comment 43(e)(7)(iv)(A)-1 as 
proposed, with minor technical changes and one modification to Sec.  
1026.43(e)(7)(iv)(A)(4) as discussed below.

Paragraphs 43(e)(7)(iv)(A)(1) and (2)

    Proposed Sec.  1026.43(e)(7)(iv)(A)(1) and (2) specified when 
periodic payments are 30 days delinquent and 60 days delinquent, 
respectively, for purposes of proposed Sec.  1026.43(e)(7)(iv). 
Proposed Sec.  1026.43(e)(7)(iv)(A)(1) provided that a periodic payment 
would be 30 days delinquent if it is not paid before the due date of 
the following scheduled periodic payment. Proposed Sec.  
1026.43(e)(7)(iv)(A)(2) provided that a periodic payment would be 60 
days delinquent if the consumer is more than 30 days delinquent on the 
first of two sequential scheduled periodic payments and does not make 
both sequential scheduled periodic payments before the due date of the 
next scheduled periodic payment after the two sequential scheduled 
periodic payments. Proposed comment 43(e)(7)(iv)(A)(2)-1 provided an 
illustrative example of the meaning of 60 days delinquent for purposes 
of proposed Sec.  1026.43(e)(7).
    The Bureau received a few comments that related to proposed Sec.  
1026.43(e)(7)(iv)(A)(1) and (2). An industry commenter noted that the 
proposed definition of delinquency refers to 30 and 60-day delinquency 
periods and asked the Bureau to modify proposed Sec.  
1026.43(e)(7)(iv)(A) to account for non-monthly payments schedules 
(e.g., bi-weekly or quarterly payment schedules). Two consumer advocate 
commenters stated that the Bureau should provide clarifying commentary 
to address rolling delinquencies. They explained that it is very common 
for struggling homeowners to have rolling delinquencies, paying 
somewhat late month after month, but never bringing the loan current. 
These commenters indicated that borrowers who pay 29 or 30 days late 
every month maintain a persistent delinquency, showing clear signs of 
financial distress, and not demonstrating an ability to repay.
    The Bureau concludes that the approach set forth in proposed Sec.  
1026.43(e)(7)(iv)(A)(1) and (2) and proposed comment 
43(e)(7)(iv)(A)(2)-1 provide appropriate standards for determining 
whether a periodic payment is 30 or 60 days delinquent that would be 
relatively easy to apply. The Bureau also finds that proposed Sec.  
1026.43(e)(7)(iv)(A) is flexible enough to account for non-monthly 
payment schedules and therefore declines to provide additional 
flexibilities to account for non-monthly payment schedules. Proposed 
Sec.  1026.43(e)(7)(iv)(A)(1) and (2) define 30 days delinquent and 60 
days delinquent based on whether payments are made before the next 
periodic payment due date. Thus, under the proposed Sec.  
1026.43(e)(7)(iv)(A)(1), a bi-weekly or quarterly periodic payment 
would be 30 days delinquent when the periodic payment is not paid 
before the due date of the following bi-weekly or quarterly payment. 
Similarly, under proposed Sec.  1026.43(e)(7)(iv)(A)(2), a bi-weekly or 
quarterly periodic payment would be 60 days delinquent if the consumer 
is more than 30 days delinquent, as defined under proposed Sec.  
1026.43(e)(7)(iv)(A)(1), on the first of two sequential scheduled 
periodic payments and does not make both sequential scheduled periodic 
payments before the due date of the next scheduled periodic payment 
after the two sequential scheduled periodic payments. The Bureau also 
does not believe any change is necessary to address rolling 
delinquencies because the performance standards in Sec.  
1026.43(e)(7)(ii) and the definition of 60 days delinquent in Sec.  
1026.43(e)(7)(iv)(A)(2) already capture rolling delinquencies, as 
discussed in the section-by-section analysis of Sec.  1026.43(e)(7)(ii) 
above. Comment 43(e)(7)(iv)(A)(2)-1 illustrates the meaning of 60 days 
delinquent for purposes of Sec.  1026.43(e)(7) by providing an example. 
The Bureau is adopting Sec.  1026.43(e)(7)(iv)(A)(1) and (2) and 
comment 43(e)(7)(iv)(A)(2)-1 as proposed, with minor technical changes 
in the comment.

Paragraph 43(e)(7)(iv)(A)(3)

    As the Bureau noted in the proposal, some servicers elect or may be 
required to treat consumers as having made a timely payment even if the 
payment is a small amount less than the full periodic payment. For 
purposes of proposed Sec.  1026.43(e)(7), proposed Sec.  
1026.43(e)(7)(iv)(A)(3) provided that for any given billing cycle for 
which a consumer's payment is less than the periodic payment due, a 
consumer is not delinquent if: (1) The servicer chooses not to treat 
the payment as delinquent for purposes of any section of subpart C of 
Regulation X, 12 CFR part 1024, if applicable, (2) the payment is 
deficient by $50 or less, and (3) there are no more than three such 
deficient payments treated as not delinquent during the seasoning 
period. The Bureau did not receive any comments on proposed Sec.  
1026.43(e)(iv)(A)(3) and, for the reasons explained below, is now 
finalizing Sec.  1026.43(e)(iv)(A)(3) as proposed.
    The Bureau concludes that the approach to small periodic payment 
deficiencies in Sec.  1026.43(e)(iv)(A)(3) will result in less burden 
for financial institutions seeking to avail themselves of the Seasoned 
QM definition, in the event that their servicing systems and practices 
already make allowances for treating a payment as not delinquent when 
the payment is deficient by a small amount. For example, a servicer may 
have systems in place to accept minimally deficient payments and not 
count them as delinquent for purposes of calculating delinquency under 
subpart C of Regulation X, 12 CFR part 1024. Further, the Bureau is 
concerned that, absent Sec.  1026.43(e)(7)(iv)(A)(3), creditors might 
find it very unlikely that many of their loans would fully meet the 
requirements to be a Seasoned QM, undermining the rule's objectives.

[[Page 86433]]

    Required periodic payments for covered transactions can vary over 
time as tax and insurance amounts change. For example, a consumer could 
overlook an annual escrow statement reflecting an escrow payment 
increase and pay the previously required amount instead of the new 
amount. The Bureau believes that small deficiencies in a limited amount 
of periodic payments often do not mean that the consumer was unable to 
repay the loan at the time of consummation.
    The Bureau has decided, however, that unless limits are imposed, 
servicers and creditors could use payment tolerances to mask 
unaffordability in a way that might undermine the purposes of this 
final rule. The Bureau understands that Fannie Mae and Freddie Mac 
servicing guidance allows servicers to apply periodic payments that are 
short by $50 or less.\159\ Fannie Mae limits the usage of the payment 
tolerance to three monthly payments during a 12-month period,\160\ 
while the National Mortgage Settlement generally required acceptance of 
at least two periodic payments that were short by $50 or less.\161\ In 
light of these practices and the considerations discussed above, the 
Bureau is adopting a cap of no more than three periodic payment 
deficiencies of $50 or less during the seasoning period to ensure that 
use of payment tolerances does not mask unaffordability. The Bureau 
concludes that allowing up to three payments deficient by $50 or less 
over the course of the seasoning period provides appropriate 
flexibility for small deficiencies such as those related to variations 
in tax and insurance amounts.\162\
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    \159\ Fannie Mae, Servicing Guide 218-19 (July 15, 2020), 
https://singlefamily.fanniemae.com/media/23346/display (July 2020 
Servicing Guide); Freddie Mac, Seller/Servicer Guide at 8103-3 (Aug. 
5, 2020), https://guide.freddiemac.com/ci/okcsFattach/get/1002095_2.
    \160\ July 2020 Servicing Guide, supra note 159, at 218-19.
    \161\ See, e.g., United States v. Bank of Am. Corp., No. 1:12-
cv-00361-RMC, 2012 U.S. Dist. LEXIS 188892, at *32 (D.D.C. Apr. 4, 
2012).
    \162\ The Bureau also notes that a deficient periodic payment 
does not trigger a delinquency of 30 days or more under Sec.  
1026.43(e)(7)(iv)(A)(1) if the consumer pays the deficient amount 
before the next periodic payment comes due.
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Paragraph 43(e)(7)(iv)(A)(4)

    Proposed Sec.  1026.43(e)(7)(iv)(A)(4) provided that unless a 
qualifying change is made to the loan obligation, the principal and 
interest used in determining the date a periodic payment sufficient to 
cover principal, interest, and, if applicable, escrow becomes due and 
unpaid are the principal and interest payment amounts established by 
the terms and payment schedule of the loan obligation at consummation. 
Proposed Sec.  1026.43(e)(7)(iv)(A)(4) focused on the principal and 
interest payment amounts established by the terms and payment schedule 
of the loan obligation at consummation because the performance 
requirements in proposed Sec.  1026.43(e)(7)(ii) were designed to 
assess whether the creditor made a reasonable and good faith 
determination of the consumer's ability to repay at the time of 
consummation.\163\
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    \163\ The Bureau is not requiring that the escrow amount (if 
applicable) be considered in determining whether a delinquency 
exists for purposes of Sec.  1026.43(e)(7) be the amount disclosed 
to the consumer at consummation, because escrow payments are subject 
to changes over time.
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    The Bureau concludes that using a principal and interest amount 
that has been modified or adjusted after consummation would not provide 
a basis for presuming that the creditor made such a determination. For 
example, if a consumer has a modified payment that is much lower than 
the original contractual payment amount, the consumer might be able to 
make the modified payments even though the contractual terms at 
consummation were not affordable.
    The Bureau recognizes, however, that certain unusual circumstances 
involving disasters or pandemic-related national emergencies warrant 
using a principal and interest amount that has been modified or 
adjusted after consummation. Accordingly, the Bureau proposed that if a 
qualifying change as defined in proposed Sec.  1026.43(e)(7)(iv)(B) is 
made to the loan obligation, the principal and interest used in 
determining the date a periodic payment sufficient to cover principal, 
interest, and, if applicable, escrow becomes due and unpaid would be 
the principal and interest payment amounts established by the terms and 
payment schedule of the loan obligation at consummation as modified by 
the qualifying change. The Bureau is finalizing Sec.  
1026.43(e)(7)(iv)(A)(4) with one modification as explained below and 
minor technical changes.
    Although the Bureau did not receive many comments relating to 
proposed Sec.  1026.43(e)(7)(iv)(A)(4), one industry commenter 
cautioned that proposed Sec.  1026.43(e)(7)(iv)(A)(4) was not flexible 
enough to apply to a small subset of loans the Bureau intended to cover 
within the scope of the proposal. Specifically, an industry trade 
association pointed out that proposed Sec.  1026.43(e)(7)(iv)(A)(4), 
which relies on the first payment due date in the legal obligation at 
consummation to determine when a loan could be first delinquent, would 
not account for changes in the first payment due date typically 
associated with the delivery of new manufactured housing. This 
commenter also noted that proposed Sec.  1026.43(e)(7)(iv)(A) would not 
account for courtesy due date changes extended by creditors, such as 
from the 1st to the 5th of the month for a borrower who receives Social 
Security benefits on the 3rd of the month.
    After considering the comments received, the Bureau is finalizing 
Sec.  1026.43(e)(7)(iv)(A)(4) with minor technical changes and one 
modification as described below to address the commenter's concern that 
creditors making loans for the purchase of new manufactured homes often 
estimate the first payment due date in the legal obligation signed at 
consummation. These dates may be uncertain at consummation due to 
potential delays involved with the delivery, set up, and availability 
for occupancy of the dwelling that secures the loan. The Bureau 
understands that, in these circumstances, creditors may modify the 
first payment date after consummation when those dates become clear so 
that the first payment date is not due until after the consumer 
occupies the home. Proposed Sec.  1026.43(e)(7)(iv)(A)(4) required 
delinquency to be calculated based on the first payment due date 
established by the terms and payment schedule of the loan obligation at 
consummation. Thus, a loan to purchase a new manufactured home might be 
considered delinquent under proposed Sec.  1026.43(e)(7)(iv)(A)(4), 
even though the consumer has not missed a payment under the terms of a 
modified agreement.
    A primary objective of the proposal was to ensure the availability 
of responsible and affordable credit by incentivizing the origination 
of non-QM loans that otherwise might not be made. In the proposal, the 
Bureau noted that half of manufactured housing originations are 
rebuttable presumption QM loans, and that large banks tend to originate 
only safe harbor QM loans that are held in portfolio. The Bureau 
concludes that modifying proposed Sec.  1026.43(e)(7)(iv)(A)(4) to 
allow creditors to modify the first payment due date in certain limited 
circumstances furthers the objective of the proposal. Accordingly, if, 
due to reasons related to the timing of delivery, set up, or 
availability for occupancy of the dwelling securing the obligation, the 
creditor modifies the first payment due date before the first payment 
due date under the legal obligation at consummation, the modified first

[[Page 86434]]

payment due date, rather than the first payment due date under the 
legal obligation at consummation, is used in determining whether a 
periodic payment is delinquent.
    The Bureau declines to make any changes to proposed Sec.  
1026.43(e)(7)(iv)(A)(4) to accommodate courtesy due date changes 
extended by creditors. As stated in the section-by-section analysis of 
Sec.  1026.43(e)(7)(ii), a loan that seasons into QM status may not 
have more than two delinquencies of 30 or more days or any 
delinquencies of 60 or more days at the end of the seasoning period. 
The Bureau concludes that this performance standard already provides 
sufficient flexibility to accommodate courtesy shifts to a different 
date within a month (such as from the 1st to the 5th of the month), 
because delinquencies of less than 30 days do not affect whether a loan 
can season under Sec.  1026.43(e)(7)(ii).

Paragraph 43(e)(7)(iv)(A)(5)

    Proposed Sec.  1026.43(e)(7)(iv)(A)(5) addressed how to handle 
payments made from certain third-party sources in assessing delinquency 
for purposes of proposed Sec.  1026.43(e)(7). Specifically, proposed 
Sec.  1026.43(e)(7)(iv)(A)(5) provided that, except for making up the 
deficiency amount set forth in proposed Sec.  
1026.43(e)(7)(iv)(A)(3)(ii), payments from the following sources would 
not be considered in assessing delinquency under proposed Sec.  
1026.43(e)(7)(iv)(A): (1) Funds in escrow in connection with the 
covered transaction, or (2) funds paid on behalf of the consumer by the 
creditor, servicer, or assignee of the covered transaction, or any 
other person acting on behalf of such creditor, servicer, or assignee.
    In the proposal, the Bureau tentatively concluded that proposed 
Sec.  1026.43(e)(7)(iv)(A)(5) would help to ensure that payments made 
by consumers during the seasoning period actually reflect the 
consumer's ability to repay. The Bureau further noted similarities 
between the proposed provision and the GSEs' representation and 
warranty framework. As discussed below, the Bureau is adopting Sec.  
1026.43(e)(7)(iv)(A)(5) as proposed in this final rule.

Comments Received

    The Bureau received two comments on this aspect of the proposal 
from industry commenters. One commenter agreed with the Bureau's 
rationale for the proposed requirement. The other commenter stated that 
the proposed provision adequately addressed its suggestion in response 
to the ANPR that the Bureau impose a requirement that mortgage payments 
come from consumers' own funds.

The Final Rule

    The Bureau is finalizing Sec.  1026.43(e)(7)(iv)(A)(5) as proposed 
because it concludes that Sec.  1026.43(e)(7)(iv)(A)(5) helps to ensure 
that the performance history considered in assessing delinquency for 
purposes of Sec.  1026.43(e)(7) reflects the consumer's ability to 
repay rather than payments made by the creditor, servicer, or assignee 
or persons acting on their behalf that could mask a consumer's 
inability to repay. As the Bureau explained in the proposal, the GSEs' 
representation and warranty framework generally prohibits lenders and 
third parties with a financial interest in the performance of a loan 
escrowing or advancing funds on a borrower's behalf to be used to make 
principal and interest payments to satisfy the framework's payment 
history requirement.\164\ Similar to the GSEs' representation and 
warranty framework, the Bureau concludes that payments made from escrow 
accounts established in connection with the loan should not be 
considered in assessing performance for seasoning purposes because a 
creditor could escrow funds from the loan proceeds to cover payments 
during the seasoning period even if the loan payments were not actually 
affordable for the consumer on an ongoing basis. If a creditor needs to 
take funds from an escrow account to cover a periodic payment that is 
due on the account, the Bureau does not believe that the payment from 
escrow indicates the consumer is able to make the periodic payment.
---------------------------------------------------------------------------

    \164\ For example, in addition to imposing conditions around the 
number and duration of delinquencies, Fannie Mae's lender selling 
representation and warranty framework provides that:
    With the exception of mortgage loans with temporary buydowns, 
neither the lender nor a third party with a financial interest in 
the performance of the loan . . . can escrow or advance funds on 
behalf of the borrower to be used for payment of any principal or 
interest payable under the terms of the mortgage loan for the 
purpose of satisfying the payment history requirement.
    Fannie Mae, Selling Guide at 56 (Aug. 5, 2020), https://singlefamily.fanniemae.com/media/23641/display (Selling Guide).
---------------------------------------------------------------------------

    Accordingly, pursuant to Sec.  1026.43(e)(7)(iv)(A)(5), any payment 
received from one of the identified sources is not considered in 
assessing delinquency, except for making up the deficiency amount set 
forth in proposed Sec.  1026.43(e)(7)(iv)(A)(3)(ii). Thus, for example, 
if a creditor or servicer advances $800 to cover a specific periodic 
payment on the consumer's behalf, it is treated as if the advanced $800 
were not paid for purposes of assessing whether that periodic payment 
is delinquent under proposed Sec.  1026.43(e)(7). However, Sec.  
1026.43(e)(7)(iv)(A)(5) does not prohibit creditors from making up a 
deficiency amount as part of a payment tolerance of $50 or less under 
the circumstances set forth in Sec.  1026.43(e)(7)(iv)(A)(3)(ii).

Paragraph 43(e)(7)(iv)(B)

    Proposed Sec.  1026.43(e)(7)(iv)(C)(2) provided that the seasoning 
period does not include certain periods during which the consumer is in 
a temporary payment accommodation extended in connection with a 
disaster or pandemic-related national emergency, provided that during 
or at the end of the temporary payment accommodation there is a 
qualifying change or the consumer cures the loan's delinquency under 
its original terms. Proposed Sec.  1026.43(e)(7)(iv)(C)(2) provided 
that, under those circumstances, the seasoning period consists of the 
period before the accommodation begins and an additional period 
immediately after the accommodation ends, which together must equal at 
least 36 months. Proposed Sec.  1026.43(e)(7)(iv)(B) defined a 
qualifying change as an agreement that meets the following conditions: 
(1) The agreement is entered into during or after a temporary payment 
accommodation in connection with a disaster or pandemic-related 
national emergency as defined in Sec.  1026.43(e)(7)(iv)(D), and must 
end any pre-existing delinquency on the loan obligation when the 
agreement takes effect; (2) the amount of interest charged over the 
full term of the loan does not increase as a result of the agreement; 
(3) the servicer does not charge any fee in connection with the 
agreement; and (4) the servicer waives all existing late charges, 
penalties, stop payment fees, or similar charges promptly upon the 
consumer's acceptance of the agreement. The Bureau is finalizing Sec.  
1026.43(e)(7)(iv)(B) largely as proposed, with modifications to the 
fees and charges that must be waived pursuant to Sec.  
1026.43(e)(7)(iv)(B)(3) and additional commentary to clarify that an 
agreement can be a qualifying change even if it is not in writing and 
that the inclusion of a balloon payment or lengthened loan term as part 
of a qualifying change does not disqualify a loan from seasoning. The 
Bureau is also making minor technical revisions to Sec.  
1026.43(e)(7)(iv)(B).
    Many commenters supported the proposal's approach of restarting the 
seasoning period if the loan undergoes a qualifying change. Some 
industry

[[Page 86435]]

commenters suggested modifying proposed Sec.  1026.43(e)(7)(iv)(B)(4) 
so that an agreement can meet the definition of a qualifying change 
even if the servicer does not waive charges, penalties, and fees that 
were incurred prior to a delinquency caused by a disaster or pandemic-
related national emergency. Some industry commenters asked that the 
Bureau clarify whether an agreement needs to be in writing in order to 
constitute a qualifying change. Some industry commenters also suggested 
that the Bureau clarify whether the inclusion of a balloon payment or 
an extension of the loan term beyond 30 years as part of a qualifying 
change would disqualify the loan from seasoning. Lastly, one industry 
commenter urged the Bureau to modify Sec.  1026.43(e)(7)(iv)(B)(2) to 
allow for the amount of interest charged over the full term of the loan 
to increase in certain circumstances, such as when certain amounts are 
capitalized into a new loan balance.
    The Bureau understands that a variety of options may be available 
to bring current a loan that is subject to a temporary payment 
accommodation extended in connection with a disaster or pandemic-
related national emergency. These options include, but are not limited 
to, curing the delinquency according to the terms of the original 
obligation, entering into a repayment plan, or entering into a 
permanent modification. In determining how to define a qualifying 
change, the Bureau seeks to establish standards that will reasonably 
ensure that any changes in the terms of a loan re-entering the 
seasoning period after a temporary payment accommodation extended in 
connection with a disaster or pandemic-related national emergency will 
not significantly change the affordability of the loan as compared to 
the loan terms at consummation. Accordingly, the Bureau concludes that 
such a qualifying change must end any pre-existing delinquency, must 
not add to the amount of interest charged over the full term of the 
loan, and must not involve an additional fee charged to the consumer in 
connection with the change.
    Section 1026.43(e)(7)(iv)(B) references an agreement that must meet 
specific conditions in order to meet the definition of a qualifying 
change. Some commenters expressed concern that the term agreement could 
be interpreted to mean that a qualifying change is required to be in 
writing. Section 1026.43(e)(7)(iv)(B) does not require that an 
agreement be in writing in order for it to meet the definition of a 
qualifying change. The Bureau is adding comment 43(e)(7)(iv)(B)-1 to 
clarify that an agreement that meets the conditions specified in Sec.  
1026.43(e)(7)(iv)(B) is a qualifying change even if it is not in 
writing.
    Some commenters expressed concern that the inclusion of a balloon 
payment or lengthened loan term as part of a qualifying change may 
disqualify a loan from seasoning due to the product restrictions listed 
in proposed Sec.  1026.43(e)(7)(i)(A). Proposed comment 43(e)(7)(i)(A)-
2 explained that proposed Sec.  1026.43(e)(7)(i)(A) would not prohibit 
a qualifying change as defined in Sec.  1026.43(e)(7)(iv)(B). In 
response to commenter concerns, the Bureau is adding additional 
language to comment 43(e)(7)(i)(A)-2 to clarify more specifically that 
Sec.  1026.43(e)(7)(i)(A) does not disqualify a loan from seasoning 
eligibility if the loan undergoes a qualifying change as defined in 
Sec.  1026.43(e)(7)(iv)(B), even if such a qualifying change involves a 
balloon payment or lengthened loan term. Although one commenter 
suggested that the Bureau address the applicability of certain loss 
mitigation protections under Regulation X in this final rule, the 
Bureau concludes it is not necessary to do so. Section 
1026.43(e)(7)(iv)(B) defines qualifying change solely for purposes of 
the Seasoned QM definition in the ATR/QM Rule and does not affect other 
requirements, such as those in Regulation X, that may affect the 
servicing of a loan.
    One commenter suggested that the Bureau should allow an agreement 
to meet the definition of a qualifying change even if the agreement 
allows for the capitalization of delinquent amounts and thereby causes 
the amount of interest charged over the full loan term to increase. As 
stated in the proposal, in establishing standards for a qualifying 
change, the Bureau sought to reasonably ensure that any such change 
would not significantly change the affordability of the loan as 
compared to the loan terms at consummation. Proposed Sec.  
1026.43(e)(7)(iv)(B)(2) would have required that, to meet the 
definition of a qualifying change, the amount of interest charged over 
the full term of the loan could not increase as a result of the 
agreement. The Bureau concludes that capitalization which leads to an 
increase in the total amount of interest charged as compared to the 
loan terms at consummation would make loans less affordable, such that 
the loans should not be eligible for seasoning. The Bureau is therefore 
adopting Sec.  1026.43(e)(7)(iv)(B)(2) as proposed.
    Proposed Sec.  1026.43(e)(7)(iv)(B)(4) would have required the 
waiver of all existing late charges, penalties, stop payment fees, or 
similar charges promptly upon the consumer's acceptance of the 
agreement in order for the agreement to meet the definition of a 
qualifying change. As with the other criteria outlined in Sec.  
1026.43(e)(7)(iv)(B), the Bureau proposed this provision in the 
definition of a qualifying change to ensure that loans that ultimately 
become Seasoned QMs remain affordable after a temporary payment 
accommodation extended in connection with a disaster or pandemic-
related national emergency.
    The Bureau has decided to modify proposed Sec.  
1026.43(e)(7)(iv)(B)(4) to allow an agreement to meet the definition of 
a qualifying change even if servicers do not waive fees, penalties, and 
charges incurred prior to a delinquency caused by a disaster or 
pandemic-related national emergency. Adopting this change suggested by 
commenters is unlikely to significantly impact the affordability of a 
loan that enters into a qualifying change for two reasons.
    First, loans with large balances for fees and charges related to 
delinquency (such as foreclosure preparation expenses) will likely 
already be disqualified from seasoning eligibility based on the 
performance requirements in Sec.  1026.43(e)(7)(ii). Second, even if 
such fees are capitalized, Sec.  1026.43(e)(7)(iv)(B)(2) will ensure 
that the amount of interest charged over the full term of the loan 
cannot increase as a result of the agreement. For these reasons, the 
Bureau is finalizing Sec.  1026.43(e)(7)(iv)(B)(4) to provide that an 
agreement can meet the definition of a qualifying change if, in 
addition to the other requirements outlined in Sec.  
1026.43(e)(7)(iv)(B), promptly upon the consumer's acceptance of the 
agreement, the servicer waives a more limited set of charges than those 
listed in proposed Sec.  1026.43(e)(7)(iv)(B)(4). Specifically, Sec.  
1026.43(e)(7)(iv)(B)(4) as finalized lists the following charges: All 
late charges, penalties, stop payment fees, or similar charges incurred 
during a temporary payment accommodation in connection with a disaster 
or pandemic-related national emergency, as well as all late charges, 
penalties, stop payment fees, or similar charges incurred during the 
delinquency that led to a temporary payment accommodation in connection 
with a disaster or pandemic-related national emergency.

Paragraph 43(e)(7)(iv)(C)

    Section 1026.43(e)(7) requires that, to become a Seasoned QM, a 
covered transaction must meet certain

[[Page 86436]]

requirements during and at the end of the seasoning period. Proposed 
Sec.  1026.43(e)(7)(iv)(C) defined the seasoning period as a period of 
36 months beginning on the date on which the first periodic payment is 
due after consummation of the covered transaction, except that: (1) If 
there is a delinquency of 30 days or more at the end of the 36th month 
of the seasoning period, the seasoning period does not end until there 
is no delinquency; and (2) the seasoning period does not include any 
period during which the consumer is in a temporary payment 
accommodation in connection with a disaster or pandemic-related 
national emergency, provided that during or at the end of the temporary 
payment accommodation there is a qualifying change or the consumer 
cures the loan's delinquency under its original terms. The Bureau is 
adopting Sec.  1026.43(e)(7)(iv)(C) largely as proposed.
    Many industry commenters expressed support for the proposed general 
seasoning period of 36 months. These commenters agreed with the 
Bureau's rationale relating to consistency with the GSEs' 
representation and warranty framework, and expressed a belief, 
consistent with the Bureau's proposal, that default after 36 months is 
not likely to be related to underwriting deficiencies. Some industry 
commenters joined several consumer advocate groups to express general 
opposition to the adoption of a Seasoned QM rule, and these commenters 
urged the Bureau not to adopt a shorter seasoning period if it 
finalized such a rule. Some consumer advocate commenters generally 
asserted that three years of performance history was not sufficient to 
establish that a creditor had made a reasonable determination of 
ability to repay at origination. These commenters pointed to anecdotal 
and survey evidence of loans that were unaffordable at origination but 
did not default until after three years. These commenters did not 
suggest a longer seasoning period, but instead expressed opposition to 
the adoption of any Seasoned QM rule. One industry commenter advocated 
for a shorter seasoning period of two years, but only for Small 
Creditor QMs.
    As explained in the proposal, in defining the length of the 
seasoning period, the Bureau seeks to balance two objectives. First, it 
seeks to ensure that safe harbor QM status accrues to loans for which 
the history of sustained, timely payments is long enough to 
conclusively presume that the consumer had the ability to repay at 
consummation. Second, in accomplishing its first objective, the Bureau 
seeks to avoid making the seasoning period so long that the Seasoned QM 
definition fails to incentivize increased access to credit, especially 
through increased originations of non-QM loans to consumers with the 
ability to repay them.
    As explained in part V above, in evaluating the length of a 
seasoning period that is long enough to demonstrate a consumer's 
ability to repay, the Bureau considered the practices of market 
participants. These market participants typically require loans to meet 
certain requirements, such as a timely payment history, for a period of 
at least three years before releasing the loans' creditors from 
potential penalties and other remedies for deficiencies in underwriting 
practices. The Bureau also focused on the timing of the first 
disqualifying event from the Seasoned QM definition as well as the rate 
at which loans terminate, either through prepayment or foreclosure, to 
assess the potential population of loans that would be eligible to 
benefit from this proposal, as discussed in part V above and 
illustrated in Figures 2 and 3 of part VIII below. Based on these 
considerations and for the reasons discussed in part V above, the 
Bureau has decided to define the seasoning period generally as a period 
of at least 36 months, beginning on the date on which the first 
periodic payment is due after consummation. The Bureau declines to 
generally shorten or lengthen the proposed seasoning period. The Bureau 
concludes that the practices of market participants and the available 
loan performance data generally support a seasoning period of 36 
months.

Paragraph 43(e)(7)(iv)(C)(1)

    The Bureau proposed a seasoning period generally of 36 months 
beginning on the date on which the first periodic payment is due after 
consummation, unless an exception applies. The first proposed exception 
extended the seasoning period if the loan is 30 days or more delinquent 
at the point when the seasoning period would otherwise end. 
Specifically, proposed Sec.  1026.43(e)(7)(iv)(C)(1) provided that if 
there is a delinquency of 30 days or more at the end of the 36th month 
of the seasoning period, the seasoning period does not end until there 
is no delinquency. The Bureau did not receive comments specifically 
addressing proposed Sec.  1026.43(e)(7)(iv)(C)(1). For the reasons 
explained below, the Bureau is adopting Sec.  1026.43(e)(7)(iv)(C)(1) 
as proposed.
    If a delinquency of 30 days or more exists in the last month of the 
seasoning period, it is possible that the delinquency will be resolved 
quickly after the seasoning period ends or that the delinquency will 
continue for an extended period. In situations in which the delinquency 
is not resolved quickly, the Bureau concludes that the loan does not 
become a Seasoned QM, because the extended delinquency, if considered 
with the consumer's prior payment history, suggests that the creditor 
failed to make a reasonable, good faith determination of ability to 
repay at consummation. The Bureau is, therefore, extending the 
seasoning period under these circumstances until the loan is no longer 
delinquent. The loan would then have to meet the performance 
requirements under Sec.  1026.43(e)(7)(ii) at the conclusion of the 
extended seasoning period based on performance over the entire, 
extended seasoning period.\165\ The Bureau believes that extending the 
seasoning period until any delinquency of 30 days or more is resolved 
will help to ensure that loans for which a creditor failed to make a 
reasonable, good faith determination of ability to repay at 
consummation do not season into QMs under this final rule. As 
finalized, Sec.  1026.43(e)(7)(iv)(C)(1) provides that, notwithstanding 
any other provision of Sec.  1026.43(e)(7), if there is a delinquency 
of 30 days or more at the end of the 36th month of the seasoning 
period, the seasoning period does not end until there is no 
delinquency.
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    \165\ A loan is eligible to season under the performance 
requirements in Sec.  1026.43(e)(7)(ii) only if it has no more than 
two delinquencies of 30 or more days and no delinquencies of 60 or 
more days at the end of the seasoning period.
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Paragraph 43(e)(7)(iv)(C)(2)

    The Bureau proposed Sec.  1026.43(e)(7)(iv)(C)(2) to address how 
the time during which a loan is subject to a temporary payment 
accommodation extended in connection with a disaster or pandemic-
related national emergency \166\ affects the seasoning period. Proposed 
Sec.  1026.43(e)(7)(iv)(C)(2) provided that any period during which the 
consumer is in a temporary payment accommodation extended in connection

[[Page 86437]]

with a disaster or pandemic-related national emergency would not be 
counted as part of the seasoning period. Proposed Sec.  
1026.43(e)(7)(iv)(C)(2) also stated that, if the seasoning period is 
paused due to a temporary payment accommodation defined in proposed 
Sec.  1026.43(e)(7)(iv)(D), a loan must undergo a qualifying change 
\167\ or the consumer must cure the delinquency under the loan's 
original terms before the seasoning period can resume. Proposed Sec.  
1026.43(e)(7)(iv)(C)(2) further explained that, under these 
circumstances, the seasoning period consists of the period from the 
date on which the first periodic payment was due after consummation of 
the covered transaction to the beginning of the temporary payment 
accommodation and an additional period immediately after the temporary 
payment accommodation ends, which together must equal at least 36 
months. For the reasons discussed below, the Bureau is finalizing Sec.  
1026.43(e)(7)(iv)(C)(2) as proposed.
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    \166\ As further discussed in the section-by-section analysis of 
Sec.  1026.43(e)(7)(iv)(D) below, the Bureau is defining a temporary 
payment accommodation extended in connection with a disaster or 
pandemic-related national emergency as temporary payment relief 
granted to a consumer due to financial hardship caused directly or 
indirectly by a presidentially declared emergency or major disaster 
under the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act, Public Law 93-288, 88 Stat. 143 (1974), or a 
presidentially declared pandemic-related national emergency under 
the National Emergencies Act, Public Law 94-412, 90 Stat. 1255 
(1976).
    \167\ As further discussed in the section-by-section analysis of 
Sec.  1026.43(e)(7)(iv)(B) above, the Bureau is establishing 
specific requirements for the type of qualifying change that can 
restart the seasoning period.
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    Many commenters were supportive of the Bureau's proposal to pause 
the seasoning period during a temporary payment accommodation extended 
in connection with a disaster or pandemic-related national emergency. 
Some industry commenters suggested that the Bureau allow the seasoning 
period to pause as soon as a delinquency occurs that is related to the 
type of disaster or pandemic-related national emergency defined in 
proposed Sec.  1026.43(e)(7)(iv)(D), regardless of whether the consumer 
enters into a temporary payment accommodation. These commenters noted 
that after a disaster or emergency, consumers may not immediately enter 
a temporary payment accommodation, or they may not be placed in a 
temporary payment accommodation prior to receiving a permanent 
modification.
    The Bureau has decided to exclude the period of time during which a 
loan is subject to certain temporary payment accommodations from the 
seasoning period for the three primary reasons stated in the proposal. 
First, the Bureau concludes that financial hardship experienced as a 
result of a disaster or pandemic-related national emergency is not 
likely to be indicative of a consumer's inability to afford a loan at 
consummation. Second, the Bureau concludes that the assessment of an 
entire 36-month seasoning period during which the consumer is obligated 
to make full periodic payments (whether based on the terms of the 
original obligation or a qualifying change) is necessary to demonstrate 
that the consumer was able to afford the loan at consummation. The 
Bureau concludes that a loan's performance during time spent in a 
temporary payment accommodation due to a disaster or pandemic-related 
national emergency should be excluded from this period because such 
accommodations typically involve reduced payments or no payment and are 
therefore not likely to assist in determining whether the creditor made 
a reasonable assessment of the consumer's ability to repay at 
consummation. Third, absent the exclusion of periods of such temporary 
payment accommodations from the seasoning period definition, financial 
institutions might have an incentive to delay offering these types of 
accommodations to consumers.
    The Bureau concludes that not making payments because of financial 
hardship experienced as a result of a disaster or pandemic-related 
national emergency is not likely to be indicative of the consumer's 
inability to afford the loan at consummation. The consumer's failure to 
make payments does not indicate that the creditor did not comply with 
the ATR requirements at the time of consummation, because the disaster 
or pandemic-related national emergency is a change in the consumer's 
circumstances after consummation that the creditor could not have 
reasonably anticipated at consummation. This determination is 
consistent with the ATR/QM Rule's distinction between failure to repay 
due to a consumer's inability to repay at the loan's consummation, 
versus a consumer's subsequent inability to repay due to unforeseeable 
changes in the consumer's circumstances. Comment 43(c)(1)-2 states that 
``[a] change in the consumer's circumstances after consummation . . . 
that cannot be reasonably anticipated from the consumer's application 
or the records used to determine repayment ability is not relevant to 
determining a creditor's compliance with the rule.'' As such, the 
Bureau determines that periods of temporary payment accommodation 
attributable to financial hardship related to a disaster or pandemic-
related national emergency should not jeopardize the possibility of the 
loan seasoning into a QM if the consumer brings the loan current or 
enters into a qualifying change.
    In evaluating how to treat periods of temporary payment 
accommodation for purposes of the seasoning period, the Bureau also 
considered how market participants address temporary payment 
accommodations with respect to penalties and other remedies for 
deficiencies in underwriting practices. The GSEs generally treat 
temporary and permanent payment accommodations as disqualifying for 
purposes of representation and warranty enforcement relief, but they 
make certain exceptions for accommodations related to disasters.\168\ 
Similarly, the master policies of mortgage insurers generally provide 
rescission relief after 36 months of satisfactory payment performance, 
but a loan that has been subject to a temporary or permanent payment 
accommodation is typically not eligible for 36-month rescission relief, 
unless the accommodation was the result of a disaster. These practices, 
which extend to a significant portion of covered transactions, suggest 
that the GSEs and mortgage insurers have concluded, based on their 
experience, that payment accommodations resulting from disasters are 
not likely to be attributed to underwriting.\169\
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    \168\ Fannie Mae's Selling Guide states that loans subject to 
non-disaster related payment accommodations ``may be eligible [for 
representation and warranty enforcement relief] on the basis of a 
quality control review of the loan file'' if certain other 
requirements are met. See Selling Guide, supra note 164, at 56. For 
purposes of representation and warranty enforcement relief, the GSEs 
allow disaster-related forbearance plans to count as part of 
seasoning periods, but only if the subject loan is brought current 
(via reinstatement, a repayment plan, or a permanent modification) 
after the forbearance plan ends. See id. at 57; Freddie Mac, Seller/
Servicer Guide at 1301-19 (Aug. 5, 2020), https://guide.freddiemac.com/ci/okcsFattach/get/1002095_2.
    \169\ Although both the GSEs and mortgage insurers appear to 
count time spent in a disaster-related forbearance plan towards the 
36-month time period, the Bureau believes that excluding temporary 
payment accommodations related to a disaster or pandemic-related 
national emergency from the seasoning period will best advance its 
goal of ensuring that the seasoning period allows enough time to 
assess whether the creditor made a reasonable determination of the 
consumer's ability to repay at consummation.
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    Temporary payment accommodations entered into for reasons other 
than disasters or emergencies meeting the definition in Sec.  
1026.43(e)(7)(iv)(D) may be a sign of ongoing consumer financial 
distress that could indicate that the creditor did not make a 
reasonable assessment of the consumer's ability to repay at 
consummation. As such, the Bureau has decided to treat periods of 
temporary payment accommodation for reasons other than disasters or 
pandemic-related national emergencies as part of the seasoning period.
    In defining limits for the types of temporary payment 
accommodations that qualify to be excluded from the seasoning period, 
the Bureau is also mindful of its goal of ensuring access to 
responsible, affordable mortgage credit

[[Page 86438]]

by establishing requirements which enable a financial institution to 
obtain a reasonable degree of certainty as to whether a loan has met 
the definition of a Seasoned QM at the end of the seasoning period. The 
Bureau is concerned that establishing a broader exclusion from the 
seasoning period (such as, for example, excluding a period of temporary 
payment accommodation entered into as the result of financial hardship 
arising from circumstances not foreseeable at origination) could lead 
to an uncertain standard whereby financial hardships resulting in 
temporary payment accommodations would need to be evaluated on a case-
by-case basis to determine whether a loan subject to such 
accommodations could season into a QM. Therefore, the Bureau has 
decided to exclude from the seasoning period temporary payment 
accommodations only for disasters and pandemic-related national 
emergencies meeting the definition in Sec.  1026.43(e)(7)(iv)(D). Some 
commenters raised concerns related to how the Bureau proposed to define 
the types of temporary payment accommodations that would be excluded 
from the seasoning period. Those comments, as well as the Bureau's 
responses to them, are addressed in the section-by-section analysis of 
Sec.  1026.43(e)(7)(iv)(D).
    The Bureau also emphasizes that, absent the exclusion of periods of 
temporary payment accommodations extended in connection with a disaster 
or pandemic-related national emergency from the seasoning period 
definition, financial institutions may be disincentivized from promptly 
offering these types of accommodations to consumers. Specifically, 
financial institutions may delay the provision of such payment 
accommodations until and unless affected loans are disqualified from 
seasoning into QM status due to accumulating two delinquencies of 30 or 
more days or one delinquency of 60 or more days. This final rule's 
exclusion of temporary payment accommodations related to a disaster or 
pandemic-related national emergency from the seasoning period is 
consistent with the Bureau's prior statements and actions encouraging 
financial institutions to move quickly to assist consumers affected by 
the urgent circumstances surrounding these types of events.\170\
---------------------------------------------------------------------------

    \170\ See, e.g., Bureau of Consumer Fin. Prot., Statement on 
Bureau Supervisory and Enforcement Response to COVID-19 Pandemic 
(Mar. 26, 2020), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-enforcement-statement_covid-19_2020-03.pdf; Press 
Release, Bureau of Consumer Fin. Prot., Agencies Provide Additional 
Information to Encourage Financial Institutions to Work with 
Borrowers Affected by COVID-19 (Mar. 22, 2020), https://www.consumerfinance.gov/about-us/newsroom/agencies-provide-additional-information-encourage-financial-institutions-work-borrowers-affected-covid-19; see also 85 FR 39055 (June 30, 2020) 
(the Bureau's June 2020 interim final rule amending Regulation X to 
allow mortgage servicers to finalize loss mitigation options without 
collecting a complete application in certain circumstances).
---------------------------------------------------------------------------

    At the same time, the Bureau recognizes that QM status is typically 
reserved for loans that meet various requirements designed to ensure 
affordability and wants to ensure that loans that season into QMs are 
affordable. For that reason, the Bureau is allowing loans to re-enter 
the seasoning period after a temporary payment accommodation ends only 
when the consumer cures the loan's delinquency under its original terms 
or specific qualifying changes are made to the loan obligation. As 
discussed further in the section-by-section analysis of Sec.  
1026.43(e)(7)(iv)(C), the limitation to qualifying changes is meant to 
ensure that any changes made to the loan terms after a temporary 
payment accommodation related to a disaster or pandemic-related 
national emergency do not make loans unaffordable. The Bureau is also 
requiring a seasoning period generally of 36 months, excluding the 
period of temporary payment accommodation, to ensure that there is 
sufficient information to evaluate the consumer's performance history 
using the performance requirements in Sec.  1026.43(e)(7)(ii).
    As noted above, some commenters suggested that delinquencies 
attributable to disasters or pandemic-related national emergencies 
should pause the seasoning period regardless of whether the consumer 
enters into a temporary payment accommodation. In developing the 
proposal, the Bureau evaluated the practices of market participants, 
such as mortgage insurers and the GSEs, with respect to penalties and 
other remedies for deficiencies in underwriting practices. Though 
mortgage insurers and the GSEs make allowances for temporary payment 
accommodations related to certain disasters, they do not extend these 
allowances to disaster-related delinquencies absent a temporary payment 
accommodation.
    Additionally, as previously noted, the Bureau wants to avoid 
discouraging servicers from providing timely temporary payment 
accommodations after disasters or emergencies. Allowing for the 
seasoning period to pause for delinquencies related to disasters or 
emergencies even if consumers are not in a temporary payment 
accommodation may reduce the incentive of servicers to timely provide 
temporary payment accommodations.
    Finally, the Bureau reiterates its goal of establishing 
requirements that enable financial institutions to obtain a reasonable 
degree of certainty as to whether a loan has met the definition of a 
Seasoned QM at the end of the seasoning period. Allowing an exclusion 
from the seasoning period for delinquencies related to certain 
disasters or emergencies without tying the exclusion to a temporary 
payment accommodation may introduce uncertainty as to whether a loan 
qualifies to season. Temporary payment accommodations are typically 
documented (for example, in servicing notes). Absent a temporary 
payment accommodation, it may be difficult for a creditor to 
retroactively demonstrate when a particular delinquency that was 
related to a disaster or pandemic-related national emergency began. For 
these reasons, the Bureau declines to adopt commenters' suggestion that 
delinquency relating to a disaster or pandemic-related national 
emergency be excluded from the seasoning period even if the consumer 
does not enter into a temporary payment accommodation.
    Proposed comment 43(e)(7)(iv)(C)(2)-1 provided an example 
illustrating when the seasoning period begins, pauses, resumes, and 
ends for a loan that enters a temporary payment accommodation extended 
in connection with a disaster or pandemic-related national emergency. 
The example used a three-month temporary payment accommodation and 
subsequent qualifying change to illustrate that, in such circumstances, 
the seasoning period would end at least three months later than 
originally anticipated at the loan's consummation. The Bureau did not 
receive any substantive comments addressing proposed comment 
43(e)(7)(iv)(C)(2)-1 and is finalizing comment 43(e)(7)(iv)(C)(2)-1 as 
proposed, with minor changes to conform to Sec.  
1026.43(e)(7)(iv)(C)(1).

Paragraph 43(e)(7)(iv)(D)

    Proposed Sec.  1026.43(e)(7)(iv)(D) addressed how a temporary 
payment accommodation made in connection with a disaster or pandemic-
related national emergency is defined. The definition of the seasoning 
period in proposed Sec.  1026.43(e)(7)(iv)(C)(2) does not include the 
period of time during which a consumer has been granted temporary 
payment relief due to a temporary payment accommodation made in 
connection with a disaster or pandemic-related national emergency. 
Proposed Sec.  1026.43(e)(7)(iv)(D) defined

[[Page 86439]]

a temporary payment accommodation in connection with a disaster or 
pandemic-related national emergency to mean temporary payment relief 
granted to a consumer due to financial hardship caused directly or 
indirectly by a presidentially declared emergency or major disaster 
under the Robert T. Stafford Disaster Relief and Emergency Assistance 
Act (Stafford Act) or a presidentially declared pandemic-related 
national emergency under the National Emergencies Act.
    Several commenters stated that they supported the Bureau's proposed 
approach of excluding from the seasoning period time spent in a 
temporary payment accommodation made in connection with a disaster or 
pandemic-related national emergency. Some industry commenters 
recommended that the Bureau expand the definition of a temporary 
payment accommodation to include accommodations related to disasters 
and emergencies declared on the State and local level. Some industry 
commenters requested that the Bureau expand the definition of a 
temporary payment accommodation to include accommodations related to 
more general financial emergencies, such as sudden job loss due to the 
closure of a consumer's place of employment.
    The Bureau is finalizing Sec.  1026.43(e)(7)(iv)(D) as proposed to 
refer only to presidentially declared emergencies or major disasters 
under the Stafford Act or presidentially declared pandemic-related 
national emergencies under the National Emergencies Act. The Bureau 
believes that defining a temporary payment accommodation in this way is 
necessary to provide sufficient certainty for financial institutions to 
ascertain what events can lead to financial hardships that result in 
temporary payment accommodations qualifying to be excluded from the 
seasoning period. The Stafford Act, which has been used for over 30 
years to facilitate Federal disaster response, including disaster 
response for emergencies and major disasters affecting only certain 
States or localities, contains detailed definitions of what are 
considered to be emergencies or major disasters under that 
statute.\171\ The National Emergencies Act, which has been in place for 
more than 40 years, was invoked to declare a national emergency due to 
the COVID-19 pandemic.\172\ The Bureau has decided that referring to 
these two statutes is necessary to provide sufficient certainty for 
financial institutions to ascertain what events can lead to financial 
hardships that result in temporary payment accommodations qualifying to 
be excluded from the seasoning period.
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    \171\ Stafford Act section 102(1) and (2), 88 Stat. 144.
    \172\ Proclamation No. 9994, 85 FR 15337 (Mar. 13, 2020). The 
Stafford Act was also invoked to declare an emergency due to the 
COVID-19 pandemic. See Press Release, The White House, Letter from 
President Donald J. Trump on Emergency Determination Under the 
Stafford Act (Mar. 13, 2020), https://www.whitehouse.gov/briefings-statements/letter-president-donald-j-trump-emergency-determination-stafford-act/.
---------------------------------------------------------------------------

    Furthermore, the Bureau's intent is that Seasoned QM eligibility 
standards apply clearly and consistently on the national level. The 
Bureau notes that the Stafford Act has frequently been invoked to 
declare emergencies and major disasters that affect only certain States 
or localities. The Bureau intends to include such federally declared 
emergencies and major disasters in Sec.  1026.43(e)(7)(iv)(D)'s 
definition, using the nationally applicable definitions outlined in the 
Stafford Act. However, while the Stafford Act and National Emergencies 
Act provide nationally applicable standards for emergency and disaster 
declarations, State and local standards for emergency and disaster 
declarations vary widely. Expanding the definition in Sec.  
1026.43(e)(7)(iv)(D) to State and local emergency and disaster 
declarations would therefore make Seasoned QM eligibility 
inconsistently available based on the location of the consumer's 
property. And as discussed above, expanding the definition to encompass 
a more general financial emergency standard would lead to uncertainty 
as to whether a loan qualifies to become a Seasoned QM. The Bureau 
therefore declines to expand the definition in Sec.  
1026.43(e)(7)(iv)(D) to include State and local emergency and disaster 
declarations or a more general financial emergency standard and is 
adopting Sec.  1026.43(e)(7)(iv)(D) as proposed.
    Proposed comment 43(e)(7)(iv)(D)-1 provided a non-exclusive list of 
examples of the types of temporary payment accommodations in connection 
with a disaster or pandemic-related national emergency that can be 
excluded from the seasoning period if they meet the definition in 
proposed Sec.  1026.43(e)(7)(iv)(D) and the requirements of proposed 
Sec.  1026.43(e)(7)(iv)(C)(2). The Bureau did not receive comments 
addressing proposed comment 43(e)(7)(iv)(D)-1 and is finalizing comment 
43(e)(7)(iv)(D)-1 as proposed.

VII. Effective Date

    The Bureau proposed that a final rule relating to this proposal 
would take effect on the same date as a final rule amending the General 
QM loan definition. In the General QM Proposal, the Bureau proposed 
that the effective date of a final rule relating to the General QM 
Proposal would be six months after publication in the Federal Register. 
The Bureau proposed that both the Seasoned QM Final Rule and the 
General QM Final Rule would apply to covered transactions for which 
creditors receive an application on or after the effective date.
    Several commenters supported aligning this final rule's effective 
date with that of the General QM Final Rule. An industry commenter 
requested that the Bureau make this final rule immediately effective to 
take advantage of the benefits as soon as possible, while another 
industry commenter suggested that this final rule not take effect until 
18 to 24 months after issuance to allow time for implementation.
    Many industry commenters requested that the Bureau apply this final 
rule to loans existing before the effective date. Such commenters 
noted, for example, that the proposal included robust consumer 
protections and suggested that such protections would apply equally 
well to existing loans as they do to future loans. On the other hand, 
consumer advocate commenters urged the Bureau not to apply the rule to 
loans in existence before the effective date, suggesting that doing so 
would likely violate the vested rights of non-QM borrowers.
    This final rule will take effect 60 days after publication in the 
Federal Register, which aligns with the effective date provided in the 
General QM Final Rule. The Bureau declines to adopt a later effective 
date because the Bureau concludes that 60 days will provide creditors 
and the secondary market adequate implementation time for this final 
rule, which adds a new QM definition but does not require creditors or 
other stakeholders to take any action if they do not intend to rely 
upon the new QM definition. The Bureau also declines to make the rule 
effective earlier than 60 days after publication in the Federal 
Register, because it wants to ensure that creditors and other 
stakeholders have adequate time to become familiar with this final rule 
before it takes effect.
    Consistent with many of the industry comments received, the Bureau 
does not believe that there is any reason to conclude that the 
inference to be drawn as to ability to repay is any different

[[Page 86440]]

depending on whether a 36-month successful payment history begins 
before or after the effective date. However, the Bureau continues to 
believe that parties to loans existing at the time of the effective 
date may have significant reliance interests related to the QM status 
of those loans.\173\ 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.
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    \173\ As indicated in the proposal, the Bureau also recognizes 
that there could be legal issues related to the application of rules 
governing mortgage origination to loans existing prior to the 
effective date. See, e.g., Landgraf v. USI Film Prods., 511 U.S. 
244, 269 (1994) (holding that a rule is impermissibly retroactive 
when it ``takes away or impairs vested rights acquired under 
existing laws, or creates a new obligation, imposes a new duty, or 
attaches a new disability, in respect to transactions or 
considerations already past'') (citation omitted); Bowen v. 
Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988) (holding that an 
agency cannot ``promulgate retroactive rules unless that power is 
conveyed by Congress in express terms'').
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    An industry trade association also asked that the Bureau use the 
definition found in the TILA-RESPA Integrated Disclosure Rule (TRID) to 
provide clarification on the meaning of ``application date'' in this 
final rule. The General QM Final Rule adds comment 43-2 to Regulation 
Z, which clarifies that, for transactions subject to TRID, creditors 
determine the date the creditor received the consumer's application, 
for purposes of the General QM Final Rule's effective date and 
mandatory compliance date, in accordance with Sec.  1026.2(a)(3)(ii), 
which is the definition of application that applies to transactions 
subject to TRID. Comment 43-2 also clarifies that, for transactions 
that are not subject to TRID, creditors can determine the date the 
creditor received the consumer's application, for purposes of the 
General QM Final Rule's effective date and mandatory compliance date, 
in accordance with either Sec.  1026.2(a)(3)(i) or (ii). The Extension 
Final Rule added a similar comment (comment 43(e)(4)-4) for purposes of 
Sec.  1026.43(e)(4)(iii)(B), as revised by the Extension Final Rule, 
which takes effect on December 28, 2020. For purposes of the effective 
date of this final rule, the Bureau is using ``application'' in a 
manner consistent with new comments 43-2 and 43(e)(4)-4. Thus, for 
transactions subject to Sec.  1026.19(e), (f), or (g), creditors 
determine the date the creditor received the consumer's application for 
purposes of the effective date of this final rule in accordance with 
TRID's definition of application in Sec.  1026.2(a)(3)(ii). For 
transactions that are not subject to TRID, creditors can determine the 
date the creditor received the consumer's application for purposes of 
the effective date of this final rule in accordance with either Sec.  
1026.2(a)(3)(i) or (ii).

VIII. Dodd-Frank Act Section 1022(b) Analysis

A. Overview

    In developing this final rule, the Bureau has considered the 
potential benefits, costs, and impacts as required by section 
1022(b)(2)(A) of the Dodd-Frank Act. Specifically, section 
1022(b)(2)(A) of the Dodd-Frank Act requires the Bureau to consider the 
potential benefits and costs of a regulation to consumers and covered 
persons, including the potential reduction of access by consumers to 
consumer financial products or services, the impact on depository 
institutions and credit unions with $10 billion or less in total assets 
as described in section 1026 of the Dodd-Frank Act, and the impact on 
consumers in rural areas. The Bureau consulted with appropriate 
prudential regulators and other Federal agencies regarding the 
consistency of this final rule with prudential, market, or systemic 
objectives administered by such agencies as required by section 
1022(b)(2)(B) of the Dodd-Frank Act.
    This final rule defines a new category of QMs for first-lien, 
fixed-rate, covered transactions that have fully amortizing payments 
and do not have loan features proscribed by the statutory QM 
requirements, such as balloon payments, interest-only features, terms 
longer than 30 years, or points and fees above prescribed amounts. 
High-cost mortgages subject to HOEPA are not eligible to season. 
Creditors will have to satisfy consider and verify requirements and 
keep the loans in portfolio until the end of the seasoning period, 
excepting a single whole-loan transfer, transfers related to mergers 
and acquisitions, and certain supervisory sales during the seasoning 
period. The loans will also have to meet certain performance 
requirements. Specifically, loans can have no more than two 
delinquencies of 30 or more days and no delinquencies of 60 or more 
days at the end of the seasoning period. Covered transactions that 
satisfy the Seasoned QM requirements will receive a safe harbor from 
ATR liability at the end of the seasoning period.
    As discussed above, a goal of this final rule is to enhance access 
to responsible, affordable mortgage credit. This final rule 
incentivizes the origination of non-QM and rebuttable presumption QM 
loans that a creditor expects to demonstrate a sustained and timely 
mortgage payment history by providing a separate path to safe harbor QM 
status for these loans if creditors' expectations are fulfilled. This 
final rule therefore may encourage meaningful innovation and lending to 
broader groups of creditworthy consumers that would otherwise not 
occur.
1. Data and Evidence
    The impact analyses rely on data from a range of sources. These 
include data collected or developed by the Bureau, including the Home 
Mortgage Disclosure Act of 1975 (HMDA) \174\ and National Mortgage 
Database (NMDB) \175\ data as well as data obtained from industry, 
other regulatory agencies, and other publicly available sources. The 
Bureau also conducted the Assessment and issued the Assessment Report 
as required under section 1022(d) of the Dodd-Frank Act. The Assessment 
Report provides quantitative and qualitative information on questions 
relevant to the analysis that follows, including the share of lenders 
that originate non-QM loans. Consultations with other regulatory 
agencies, industry, and research organizations inform the Bureau's 
impact analyses.
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    \174\ Public Law 94-200, tit. III, 89 Stat. 1125 (1975). HMDA 
requires many financial institutions to maintain, report, and 
publicly disclose loan-level information about mortgages. These data 
help show whether creditors are serving the housing needs of their 
communities; they give public officials information that helps them 
make decisions and policies; and they shed light on lending patterns 
that could be discriminatory. HMDA was originally enacted by 
Congress in 1975 and is implemented by Regulation C. See Bureau of 
Consumer Fin. Prot., https://www.consumerfinance.gov/data-research/hmda (last visited Nov. 30, 2020).
    \175\ The NMDB, jointly developed by the FHFA and the Bureau, 
provides de-identified loan characteristics and performance 
information for a 5 percent sample of all mortgage originations from 
1998 to the present, supplemented by de-identified loan and borrower 
characteristics from Federal administrative sources and credit 
reporting data. See Bureau of Consumer Fin. Prot., Sources and Uses 
of Data at the Bureau of Consumer Financial Protection at 55-56 
(Sept. 2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. Differences in total market size 
estimates between NMDB data and HMDA data are attributable to 
differences in coverage and data construction methodology.
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    The data the Bureau relied upon provide detailed information on the 
number, characteristics, pricing, and performance of mortgage loans 
originated in recent years. In response to the Seasoned QM Proposal, 
the Bureau did not receive additional information or data that could 
inform quantitative estimates such as APRs or other costs like those 
associated with private mortgage insurance.

[[Page 86441]]

    The data provide only limited information on the costs to creditors 
of uncertainty related to legal liability that this final rule may 
mitigate. As a result, the analysis of impacts of this final rule on 
creditor costs from reduced uncertainty related to legal liability 
relies on simplifying assumptions and qualitative information as well 
as the limited data that are available. This analysis indicates the 
relative magnitude of the potential effects of this final rule on these 
costs.
    Finally, as discussed further below, the analysis of the impacts of 
this final rule requires the Bureau to use current data to predict the 
number of originations of certain types of non-QM loans and the 
performance of these loans. It is possible, however, that the market 
for mortgage originations may shift in unanticipated ways given the 
changes considered below.
2. Description of the Baselines
    The Bureau considers the benefits, costs, and impacts of the final 
rule against two baselines. The first baseline (Baseline 1) takes into 
account that the Bureau's final rule amending the General QM loan 
definition is adopted. The second baseline (Baseline 2) assumes that 
the Bureau does not amend the General QM loan definition and the 
Temporary GSE QM loan definition expires when the GSEs cease to operate 
under conservatorship.
    Under each baseline, there are different numbers of loans that 
would be originated, and which would meet all of the requirements for a 
Seasoned QM at consummation except for the performance and portfolio 
requirements of this final rule. These are the loans under each 
baseline that are first-lien, fixed-rate covered transactions that 
comply, as described above, with certain general restrictions on 
product features, points-and-fees limits, and underwriting 
requirements. Further, only some of these loans would benefit if they 
met the performance and portfolio requirements for a Seasoned QM, 
meaning that as a result of meeting those requirements, they would 
obtain QM status or a stronger presumption of compliance, or would not 
need to satisfy the portfolio retention requirements that would be 
necessary to maintain safe harbor QM status under the EGRRCPA. The 
analysis below predicts the annual number of loan originations under 
each baseline, in years similar to 2018, that would meet all of the 
requirements of a Seasoned QM at consummation (except for the 
performance and portfolio requirements) and would benefit if they met 
the performance and portfolio requirements during the seasoning period. 
Upon satisfying all the requirements of the Seasoned QM definition, 
these loans would obtain QM status or a stronger presumption of 
compliance, or would not need to satisfy the portfolio retention 
requirements of the EGRRCPA.\176\ Relative to the proposal, the Bureau 
has updated its methodology in two ways. First, the estimates for 
Baseline 1 have been updated to reflect updates to the pricing 
thresholds in the General QM Final Rule. Second, the Bureau has also 
adjusted its analysis to reflect an improved methodology to identify 
creditors eligible to originate loans as small creditors under Sec.  
1026.43(e)(5), consistent with the section 1022(b) analysis 
accompanying the General QM Final Rule.
---------------------------------------------------------------------------

    \176\ Thus, the analysis estimates the maximum number of loans 
under each baseline that would become Seasoned QMs if the loans met 
the performance and portfolio requirements. The Bureau has 
discretion in any rulemaking to choose an appropriate scope of 
analysis with respect to benefits, costs, and impacts, as well as an 
appropriate baseline or baselines.
---------------------------------------------------------------------------

    As stated above, under Baseline 1, the General QM Final Rule is 
adopted. Consider first all of the non-QM loans under Baseline 1 that 
would meet all of the requirements at consummation for a Seasoned QM 
and would benefit if they met the performance and portfolio 
requirements of the seasoning period.\177\ To count these loans, the 
Bureau used 2018 HMDA data to identify all residential first-lien, 
fixed-rate conventional loans for one-to-four unit housing that do not 
have prohibited features or other disqualifying characteristics; are 
not Small Creditor QMs or entitled to a presumption of compliance under 
the EGRRCPA QM definition; \178\ and for which the APR exceeds APOR by 
the amounts specified in the General QM Final Rule's amendments to 
Sec.  1026.43(e)(2)(vi)(A) through (F). The Bureau estimates that there 
are 21,269 of these loans. These loans would benefit from this final 
rule by obtaining safe harbor QM status if they meet the performance 
and portfolio requirements of the seasoning period, and not 
otherwise.\179\
---------------------------------------------------------------------------

    \177\ Analysis of HMDA data for Baseline 1 excludes loans where 
rate spread is not observed.
    \178\ EGRRCPA section 101 provides that loans must be originated 
and retained in portfolio by a covered institution, except for 
limited permissible transfers. Although EGRRCPA section 101 took 
effect upon enactment, the Bureau has not undertaken rulemaking to 
address any statutory ambiguities in Regulation Z.
    \179\ Note that the analysis uses 2018 data, but this final rule 
does not apply to these loans since this final rule applies to 
covered transactions for which creditors receive an application on 
or after the effective date.
---------------------------------------------------------------------------

    Consider next all of the rebuttable presumption QM loans under 
Baseline 1 that would meet all of the requirements at consummation for 
a Seasoned QM and would benefit if they met the performance and 
portfolio requirements of the seasoning period. To count these loans, 
the Bureau has used 2018 HMDA data to identify two groups of loans. The 
first group is all fixed-rate, higher-priced covered transactions that 
meet the proposed General QM loan definition but are not Small Creditor 
QM loans or loans entitled to a presumption of compliance under the 
EGRRCPA QM definition. The Bureau estimates that there are 108,020 of 
these loans. The second group is all fixed-rate rebuttable presumption 
Small Creditor QMs. The Bureau estimates that there are 3,137 of these 
loans. Thus, the Bureau estimates that 111,157 loans would benefit from 
this final rule by obtaining safe harbor QM status instead of 
rebuttable presumption QM status if they meet the performance and 
portfolio requirements of the seasoning period, and not otherwise.\180\
---------------------------------------------------------------------------

    \180\ The Bureau assumes solely for purposes of this section 
1022(b) analysis that all loans originated under the EGRRCPA QM 
definition will obtain a safe harbor in the form of a conclusive 
presumption of compliance with the ATR requirements. To the extent 
some subset of such loans should qualify for a lesser presumption, 
however, these loans would comprise a third group for consideration 
here, since these loans would benefit if they met the performance 
and portfolio requirements of the seasoning period.
---------------------------------------------------------------------------

    Finally, consider all of the loans under Baseline 1 that are 
entitled to a presumption of compliance under the EGRRCPA QM definition 
and that (1) meet all of the requirements at consummation for a 
Seasoned QM and (2) do not otherwise satisfy the criteria to qualify 
for a safe harbor under the General QM Final Rule or the Small Creditor 
QM definition. The Bureau estimates that there are 23,200 loans in this 
category. This set of loans could obtain a safe harbor as Seasoned QMs 
without satisfying the portfolio retention requirements that would be 
necessary to obtain protection from liability under the EGRRCPA, 
provided they meet the performance and portfolio requirements of the 
seasoning period, and not otherwise.
    Thus, under Baseline 1, approximately 155,626 loans would meet all 
of the requirements at consummation for Seasoned QMs and would obtain 
QM status or a stronger presumption of compliance, or would not need to 
satisfy the portfolio retention requirements of the EGRRCPA, if they 
subsequently meet the performance and portfolio requirements of the 
seasoning period. This is the

[[Page 86442]]

expected annual number of loan originations under Baseline 1 in years 
similar to 2018 that meet all of the requirements of a Seasoned QM at 
consummation and would benefit if they met the performance and 
portfolio requirements of the seasoning period. Some of these loans 
very likely will meet those performance and portfolio requirements, and 
some very likely will not.\181\
---------------------------------------------------------------------------

    \181\ The Bureau cannot reliably measure the full expansionary 
effect of this final rule on loan originations. One effect might be 
that this final rule would cause the share of loan applications that 
lead to originations of non-QM loans under the baseline (88 percent) 
to match the overall share (95 percent for loan applications for 
which Bureau data include the rate spread). This would lead to an 
additional 1,800 non-QM originations not accounted for above.
---------------------------------------------------------------------------

    Now consider Baseline 2. As stated above, under Baseline 2, no 
amendments to the General QM loan definition are adopted, and the 
Temporary GSE QM loan definition expires when the GSEs cease to operate 
under conservatorship. The Bureau estimates effects under Baseline 2 
subsequent to the expiration of the Temporary GSE QM loan definition. 
While there is not a fixed date on which the Temporary GSE QM loan 
definition will expire in the absence of the final rule amending the 
General QM requirements, the Bureau anticipates that the GSEs will 
eventually cease to operate under conservatorship. Consider first all 
of the non-QM loans under Baseline 2 that would meet all of the 
requirements at consummation for a Seasoned QM and would benefit if 
they met the performance and portfolio requirements of the seasoning 
period.\182\ To count these loans, the Bureau has used 2018 HMDA data 
to identify all residential first-lien, fixed-rate conventional loans 
for one-to-four unit housing that do not have prohibited features or 
other disqualifying characteristics; are not Small Creditor QMs or 
originated under the EGRRCPA QM definition; and do not satisfy the DTI 
requirement specified in Sec.  1026.43(e)(2)(vi) of the current General 
QM loan definition. The Bureau estimates that there are 718,509 of 
these loans. These loans would benefit from this final rule by 
obtaining safe harbor QM status if they meet the performance and 
portfolio requirements of the seasoning period, and not otherwise.
---------------------------------------------------------------------------

    \182\ Analysis of HMDA data for Baseline 2 excludes loans where 
rate spread or DTI are not observed.
---------------------------------------------------------------------------

    Consider next all of the rebuttable presumption QM loans under 
Baseline 2 that would meet all of the requirements at consummation for 
a Seasoned QM and would benefit if they met the performance and 
portfolio requirements of the seasoning period. To count these loans, 
the Bureau has used 2018 HMDA data to identify two groups of loans. The 
first group is all first-lien, fixed-rate higher-priced covered 
transactions that meet the current General QM loan definition, but 
which are not Small Creditor QMs or loans entitled to a presumption of 
compliance under the EGRRCPA QM definition. The Bureau estimates that 
there are 87,122 of these loans. The second group is all first-lien, 
fixed-rate rebuttable presumption Small Creditor QMs. The Bureau 
estimates that there are 3,137 of these loans. Thus, the Bureau 
estimates that 90,259 loans would obtain safe harbor QM status instead 
of rebuttable presumption QM status if they meet the performance and 
portfolio requirements of the seasoning period, and not otherwise.\183\
---------------------------------------------------------------------------

    \183\ The same caveat with respect to EGRRCPA section 101 
discussed for Baseline 1 applies here as well.
---------------------------------------------------------------------------

    Finally, consider all of the loans under Baseline 2 that are 
entitled to a presumption of compliance under the EGRRCPA QM definition 
and that (1) meet all of the requirements at consummation for a 
Seasoned QM and (2) do not otherwise satisfy the criteria to qualify 
for a safe harbor under the General QM Final Rule or the Small Creditor 
QM definition. The Bureau estimates that there are 123,875 loans that 
would fall into this category. This set of loans could obtain a safe 
harbor as Seasoned QMs without satisfying the portfolio retention 
requirements that would be necessary to obtain protection from 
liability under the EGRRCPA, provided they meet the performance and 
portfolio requirements of the seasoning period, and not otherwise.
    Thus, under Baseline 2, approximately 932,643 loans would meet all 
of the requirements at consummation for Seasoned QMs and would obtain 
QM status, a stronger presumption of compliance, or relief from 
portfolio retention requirements, if they subsequently meet the 
performance and portfolio requirements of the seasoning period. This is 
the expected annual number of loan originations under the baseline in 
years similar to 2018 that meet all of the requirements of a Seasoned 
QM and would benefit if they met the performance and portfolio 
requirements of the seasoning period. Some of these loans very likely 
will meet those performance and portfolio requirements, and some very 
likely will not.

B. Potential Benefits and Costs to Covered Persons and Consumers

    This final rule reduces the chance a consumer will assert or 
succeed when asserting violations of ATR requirements in a defense to 
foreclosure. This section considers the potential benefits and costs of 
this final rule on creditors first and then consumers. The analysis 
begins by assessing how this final rule could potentially affect 
creditors' litigation risk, cost of origination, and the price of 
borrowing, holding originations constant. The analysis then considers 
the potential impacts of this final rule on originations and the 
benefits and costs of this effect. The Bureau cannot reliably quantify 
this effect, so the analysis considers qualitatively the potential 
benefits to both creditors and consumers of market expansion.
    Several commenters noted that the proposal lacked an analysis that 
quantified market expansion and subsequently weighed the consumer value 
of those effects against the consumer value of changes to foreclosure 
defense. The Bureau agrees that it would be valuable to conduct such an 
analysis. However, the Bureau is not aware of data that would permit it 
to reliably do so. One would first need to estimate how this final rule 
will change creditors' cost savings by decreasing litigation risk. 
Second, one needs to estimate how much of those cost savings will be 
passed through to consumers, for which consumers, and via which 
mortgage products. Third, one needs to estimate how many new consumers 
would obtain mortgage loans and which loans they would obtain. Fourth, 
one would need to estimate how much these new consumers value their 
newfound access to credit. Fifth, an analysis needs two pieces of 
information for two classes of borrowers: Those who would borrow 
regardless of whether the Bureau promulgates this final rule and those 
who are induced to borrow as a result of it. For each class, one would 
need to estimate the rate at which such borrowers experience 
foreclosure and the value to such borrowers of an ATR defense in 
foreclosure. If the Bureau does not have the data that would be needed 
to produce these estimates, the Bureau provides a qualitative 
discussion below based on economic principles and the Bureau's 
experience within and expertise in the mortgage markets.
1. Benefits and Costs to Covered Persons
Benefits From Reduced Litigation Risk
    Covered persons, specifically mortgage creditors, primarily benefit

[[Page 86443]]

from decreased litigation risk under this final rule. Generally, the 
statute of limitations for a private action for damages for a violation 
of the ATR requirement is three years after the date on which the 
violation occurs. In the proposal, the Bureau anticipated that the 
Seasoned QM definition would not curtail the ability of consumers to 
bring affirmative claims seeking damages for alleged violations of the 
ATR requirements because the proposed seasoning period would generally 
coincide with the statute of limitations. One academic commenter 
indicated that under the proposal, loans could season during pending 
litigation, cutting off claims filed within the three-year statute of 
limitations period. The Bureau acknowledges that because litigation 
takes time, it is possible that some loans could season under Sec.  
1026.43(e)(7) after an ATR/QM claim is timely filed, cutting off claims 
filed prior to the statute of limitations. Nevertheless, the aggregate 
effects of consumers' loans seasoning during litigation are likely to 
be small under current levels of originations and rates of affirmative 
claims. However, because the Bureau does not have either the data to 
quantify the new loans that will be originated as a result of the final 
rule nor the rate at which claims will be brought against creditors of 
those loans, it also cannot reliably forecast these economic impacts on 
consumers in the case of market expansion or changing market 
conditions.
    TILA also authorizes a consumer to assert a violation of the ATR 
requirements as a defense in the event of a foreclosure without regard 
for the time limit on a private action for damages for such a 
violation. For Seasoned QMs that are non-QM loans or rebuttable 
presumption QM loans at consummation, this final rule will effectively 
limit the consumer's ability to establish non-compliance with the ATR 
requirements after the seasoning period has run as a general matter.
    The creditors' economic value of the reduction of litigation risk 
is related to how each of three factors changes with this final rule 
relative to the baseline: (1) The fraction of consumers that enter 
foreclosure, (2) the likelihood that ATR defenses are successful in 
foreclosure lawsuits, and (3) the costs associated with the lawsuits. 
The Bureau analyzed NMDB data to assess the first factor and, in the 
Seasoned QM Proposal, sought pertinent information related to ATR 
defenses in foreclosure proceedings and related costs. One consumer 
advocate commenter argued that the value of ATR defense can be 
ascertained from past experiences with ATR litigation. Noting only a 
single case of ATR litigation since the ATR/QM Rule went into effect, 
the commenter offered several case studies from prior to the January 
2013 Final Rule. Given the differences in legal circumstances between 
before and after the Dodd-Frank Act, it is not clear that ATR 
litigation from prior to the Dodd-Frank Act provides a sound basis for 
assessing changes in aggregate litigation risk from this final rule.
    An academic commenter asserted that if the proposal were adopted, 
the resulting new non-QM originations could reflect riskier features 
and suggested that, as a result, those that would season would also 
enter foreclosure at a rate higher than the Bureau's foreclosure 
analysis suggests. The Bureau acknowledges that its foreclosure 
analysis reflects characteristics of loans originated in the past and 
not necessarily those that would be originated as a result of this 
final rule. However, the Bureau does not agree with the commenter's 
premise that if this final rule resulted in an expansion of credit, the 
new loans would necessarily reflect riskier features, and default and 
foreclosure start rates would increase. Accompanying the consider and 
verify requirements, product restrictions (such as the limitation to 
first-lien, fixed-rate loans), and points-and-fees restrictions of this 
final rule, the portfolio and performance requirements incentivize 
creditors to originate loans that will perform, since otherwise they 
will not season and obtain a safe harbor. Nonetheless, the Bureau is 
unaware of data that would allow it to forecast new originations' 
characteristics or the fraction that would meet the performance 
requirements to become Seasoned QMs. Correspondingly, the Bureau cannot 
assess how the foreclosure start rate of the subsequent non-QM loans, 
seasoned or otherwise, would differ from the foreclosure start rate of 
loans originated in the past. Finally, the overall foreclosure start 
rate reflects foreclosure starts of both loans that would be originated 
as a result of this final rule's expansion of credit and those that 
would be originated regardless. If this final rule results in an 
expansion of credit of only a few loans, the foreclosure analysis would 
be relatively unaffected regardless of the foreclosure risk of those 
loans. Conversely, the Bureau's foreclosure analysis may be less 
reliable if this final rule results in a major expansion of credit. As 
stated previously, the Bureau is unaware of data that would allow it to 
quantify the size of market expansion.
    The full NMDB data are a nationally representative sample of 
mortgages from 1998 to 2020, covering periods with differing economic 
and interest rate environments. Of these mortgages, the analysis 
focuses on conventional, fixed-rate purchase and refinance loans with 
no prohibited features that were privately held at consummation. Due to 
data limitations in the NMDB, the analysis of loan performance makes 
three assumptions. First, loans would continue to be originated under 
each baseline with the same characteristics regardless of QM status. 
Second, potentially seasonable loans are ineligible for the portfolio 
requirements of the EGRRCPA and thus can only achieve safe harbor 
status via this final rule. The proposal would have required that loans 
be held in portfolio unless transfers are related to mergers and 
acquisitions and certain supervisory sales during the seasoning period. 
This final rule additionally allows a single whole-loan transfer. The 
change does not affect the analysis.\184\
---------------------------------------------------------------------------

    \184\ NMDB data do not permit one to ascertain the number of 
times ownership of privately held loans that were not securitized 
was transferred between institutions. Whereas the analysis in the 
proposal assumed that unsecuritized, privately held loans were held 
in portfolio by a single party, this analysis assumes that the same 
loans were not transferred more than once.
---------------------------------------------------------------------------

    The likely quantitative impact of this final rule depends in part 
on the rate of attrition for loans during the first three years, as 
well as on the performance of the loans that are active for at least 
three years. Figure 2 plots the fraction of higher-priced loans, those 
with an interest rate 150 basis points or more over the Primary 
Mortgage Market Survey (PMMS), that were open after three years between 
2004 and 2013 in order to provide context for the quantitative 
foreclosure analysis that follows.

[[Page 86444]]

[GRAPHIC] [TIFF OMITTED] TR29DE20.401

    Figure 2 serves as a reminder that, over time, the effects of this 
final rule will depend on trends in interest rates. Loans originated 
between 2004 and 2009 were typically originated at higher interest 
rates and therefore would receive a significant benefit from 
refinancing when interest rates declined during and after the 2008 
financial crisis. Loans originated in these same years also experienced 
elevated foreclosure start rates during the 2008 financial crisis. As a 
result, a lower share of loans remained active beyond three years, and 
so the potential effects of this final rule would be smaller. This 
contrasts to post-crisis origination years where initial mortgage rates 
and foreclosure start rates remained low and a larger share of loans 
remained active beyond three years.

[[Page 86445]]

[GRAPHIC] [TIFF OMITTED] TR29DE20.402

    Figure 3 provides additional context for the quantitative 
foreclosure analysis. The figure considers higher-priced loans 
originated between 1998 to 2008, all of which incur sufficient late 
payments or delinquencies to disqualify them from seasoning depending 
on the specified length of the seasoning period. Figure 3 shows, for 
example, that 66 percent of loans with these performance problems would 
have been disqualified from seasoning under this final rule's seasoning 
period of 36 months. This compares to 53 percent of such loans if the 
seasoning period were 24 months and 76 percent if the seasoning period 
were 48 months.
Foreclosure Risk of Loans That Meet Seasoned QM's Performance 
Requirements in Baseline 1
    To assess this final rule's potential effect on foreclosure risk, 
the Bureau analyzed data from the NMDB on the 1,275,480 conventional 
fixed-rate, first-lien loans that were originated between 2012 and 2013 
without prohibited features. The loans potentially would have met this 
final rule's Seasoned QM performance criteria in 2015 and 2016.
    The analyses first classify loans by whether they would have 
satisfied the General QM Final Rule's requirements for safe harbor and 
rebuttable presumption in Baseline 1 at consummation.\185\ Ten percent 
of loans would have been either rebuttable presumption or non-QM loans 
and would have potentially benefited from the Seasoned QM definition's 
pathway to safe harbor if they had met the final rule's performance 
requirements.
---------------------------------------------------------------------------

    \185\ The NMDB data do not enable the Bureau to ascertain 
whether loans were originated by creditors that meet the size 
criteria for originating QM loans under the Small Creditor QM or 
EGRRCPA QM definitions.

   Table 1--Share of Loans Under Baseline 1 That Were Open and Had Not
  Entered Foreclosure After Three Years and Would Have Met Performance
                                Criteria
------------------------------------------------------------------------
                                           Open and  had        Met
                                           not  entered     performance
                                            foreclosure      criteria
              Type of loan                  after three     (cond.  on
                                               years           open)
                                             (percent)       (percent)
------------------------------------------------------------------------
Safe Harbor.............................              78              99
Seasonable Loans........................              78              92
    Rebuttable Presumption..............              81              94
    Non-QM..............................              73              86
Missing Rate Spread.....................              61              87

[[Page 86446]]

 
All Loans...............................              77              97
------------------------------------------------------------------------

    Classifying loans according to their status under Baseline 1, Table 
1 reports the fraction of loans that were open and had not entered 
foreclosure after three years and of those open loans, the fraction 
that would have met the performance criteria of this final rule. 
Seventy-eight percent of loans that would have been originated as 
either rebuttable presumption QM loans or non-QM loans were still open 
after three years, and of those, 92 percent satisfied the performance 
criteria to qualify for Seasoned QM status under this final rule. By 
way of comparison, the corresponding fractions for loans originated as 
safe harbor were 78 percent and 99 percent, respectively. Altogether, 
71 percent of the loans that would have been rebuttable presumption QM 
loans and non-QM loans under Baseline 1 would have performed well 
enough to gain safe harbor status via Seasoned QM under this final 
rule.
    The relief from litigation risk depends in part on the fraction of 
these loans that would eventually enter foreclosure proceedings. Table 
2 reports the share of loans under Baseline 1 that entered foreclosure 
between origination and the first quarter of 2020 among all loans 
consummated between 2012 and 2013, those that were still open and had 
not entered foreclosure three years after origination, and those that 
met the performance criteria of this final rule. 0.2 percent of loans 
open for at least three years enter foreclosure proceedings before 
March 2020. Among the loans that would have satisfied this final rule's 
Seasoned QM performance requirements, foreclosure proceedings began for 
1.6 percent of loans that would be non-QM loans in Baseline 1 and for 
0.5 percent of loans that would be rebuttable presumption QM loans 
under Baseline 1. Combined, 0.8 percent of loans that met the 
performance requirements and were potentially seasonable at 
consummation would have started foreclosure proceedings. By comparison, 
for loans that were still open, had not entered foreclosure after three 
years, and would have been originated as safe harbor under Baseline 1, 
only 0.1 percent of loans entered foreclosure after year three. Thus, 
the average foreclosure start rate among open loans with safe harbor 
status after three years--either from General QM status at consummation 
or from Seasoned QM status--would be higher than under Baseline 1, 
reflecting the inclusion of Seasoned QMs.

                        Table 2--Share of Loans That Entered Foreclosure Under Baseline 1
----------------------------------------------------------------------------------------------------------------
                                                                                     . . . open
                                                                                    and had not    . . . and met
                                                                     All loans        entered       performance
                          Type of loan                               (percent)      foreclosure      criteria
                                                                                   after 3 years     (percent)
                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Safe Harbor.....................................................             0.3             0.2             0.1
Seasonable Loans................................................             2.3             2.3             0.8
    Rebuttable Presumption......................................             1.1             1.1             0.5
    Non-QM......................................................             4.5             4.7             1.6
Missing Rate Spread.............................................             3.8             1.8             0.4
All Loans.......................................................             0.7             0.5             0.2
----------------------------------------------------------------------------------------------------------------

    The Bureau analyzed loans originated in 2012 and 2013 instead of 
other periods for several reasons. This period likely predicts the 
benefits and costs of this final rule during a period of normal 
economic expansion. The Bureau excluded later vintages because the 
analysis requires both a minimum three-year look-forward period to 
assess Seasoned QM's performance requirements as well as additional 
time to see whether foreclosures eventually emerge. As the Bureau 
explained in the proposal,\186\ the Bureau excluded earlier vintages 
whose loan performance may have been affected by the 2008 financial 
crisis. The crisis years were somewhat unusual in the high number of 
homes with negative equity and the slow pace of the subsequent economic 
recovery. Thus, the number of loans that would have disqualifying 
events would be overstated compared to those in a typical business 
cycle. Using data from an even earlier cycle of expansion and 
contraction might be more informative about average benefits and costs 
over the long term, but older data would also reflect the features of 
the housing and mortgage markets of an earlier time that may no longer 
be relevant to current market conditions. The analysis below should be 
understood with this background in mind.
---------------------------------------------------------------------------

    \186\ 85 FR 53568, 53596 n.154 (Aug. 28, 2020).
---------------------------------------------------------------------------

    Notwithstanding these considerations, one commenter asserted that 
the narrow selection of vintages would lead one to overstate the 
effectiveness of the proposed Seasoned QM performance criteria in 
limiting foreclosure. Instead, the Bureau's analysis of loan vintages 
from periods of economic distress such as the 2008 financial crisis 
suggests that their exclusion had the opposite effect. Continuing to 
limit the analysis to conventional, fixed-rate purchase and refinance 
loans with no prohibited features that were privately held at 
consummation, open, and had not

[[Page 86447]]

entered foreclosure after three years, Figure 4 plots the difference in 
foreclosure start rates between loans that would have had a safe harbor 
at origination under Baseline 1 with loans that would have met the 
performance criteria of this final rule and obtained a safe harbor from 
Seasoned QM status. Among loans that were originated between 2005 and 
2009, those that would have obtained a safe harbor from seasoning 
entered foreclosure at a lower rate than loans that would have obtained 
a safe harbor from satisfying the General QM requirements at 
origination. Loan vintages from the 2008 financial crisis overstate 
rather than understate this final rule's effectiveness for two reasons. 
First, a greater share of potentially seasonable loans became 
delinquent within 36 months, and thus a smaller share of potentially 
seasonable loans met the performance criteria of this final rule. 
Second, while the remainder did enter foreclosure at a higher rate than 
in other periods, lower priced loans that would have had a safe harbor 
from origination became delinquent and entered foreclosure at an even 
higher rate.
[GRAPHIC] [TIFF OMITTED] TR29DE20.403

Foreclosure Risk of Loans That Meet Seasoned QM's Performance 
Requirements in Baseline 2
    Paralleling the analyses of this final rule relative to Baseline 1, 
the analyses here classify loans by whether they would have satisfied 
the General QM requirements for safe harbor and rebuttable presumption 
QM loans in Baseline 2 and whether they would have satisfied the 
performance requirements of this final rule. Eight percent of analyzed 
loans would have been non-QM loans or rebuttable presumption QM loans 
at consummation under Baseline 2 and would have potentially gained safe 
harbor status if they had met this final rule's Seasoned QM performance 
criteria. Most of these loans (92 percent) would be non-QM at 
consummation. These estimates likely overestimate the fraction of non-
QM loans that would be originated under Baseline 2.

[[Page 86448]]



   Table 3--Share of Loans Under Baseline 2 That Were Open and Had Not
   Entered Foreclosure After Three Years and Meet Performance Criteria
------------------------------------------------------------------------
                                           Open and  had        Met
                                           not  entered     performance
                                            foreclosure      criteria
              Type of loan                  after three     (cond.  on
                                               years           open)
                                             (percent)       (percent)
------------------------------------------------------------------------
Safe harbor.............................              85              99
Seasonable loans........................              86              98
    Rebuttable presumption..............              58              92
    Non-QM..............................              89              99
Missing rate spread.....................              76              97
All loans...............................              77              97
------------------------------------------------------------------------

    Classifying loans according to their status under Baseline 2, Table 
3 reports the fraction of loans that were open and had not entered 
foreclosure after three years and of those open loans, the fraction 
that would have met the performance criteria of this final rule. 
Eighty-six percent of the loans that would have been potentially 
seasonable at consummation under Baseline 2 were still open after three 
years, of which 98 percent would have satisfied this final rule's 
Seasoned QM performance requirements.
    Table 4 reports the share of loans under Baseline 2 that entered 
foreclosure between origination and the first quarter of 2020 among all 
loans consummated between 2012 and 2013, those that were still open and 
had not entered foreclosure three years after origination, and those 
that met the performance criteria of this final rule. Among the loans 
that satisfied this final rule's performance requirements, foreclosure 
proceedings began for 0.2 percent of loans that would have been 
potentially seasonable at consummation under Baseline 2. By comparison, 
0.1 percent of loans that would have already met General QM's safe 
harbor requirements entered foreclosure after year three.

                         Table 4--Share of Loans That Enter Foreclosure Under Baseline 2
----------------------------------------------------------------------------------------------------------------
                                                                                  . . . open and
                                                                                      had not      . . . and met
                                                                                      entered       performance
                          Type of loan                               All loans      foreclosure      criteria
                                                                                  after 3  years     (percent)
                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Safe Harbor.....................................................             0.2             0.2             0.1
Seasonable Loans................................................             0.4             0.5             0.2
    Rebuttable Presumption......................................             2.3             4.0             0.0
    Non-QM......................................................             0.2             0.2             0.2
Missing Rate Spread.............................................             0.7             0.5             0.2
All Loans.......................................................             0.7             0.5             0.2
----------------------------------------------------------------------------------------------------------------

    The analysis suggests that the foreclosure start rate for open 
loans with safe harbor status after three years--either from General QM 
at consummation or from Seasoned QM--would not be appreciably different 
than under Baseline 2.
    As explained above, the Bureau cannot translate the reduction in 
foreclosure start rates into dollar savings on litigation costs because 
the Bureau lacks data on the likelihood each consumer would 
successfully challenge foreclosure and on the cost of each subsequent 
case of litigation. In the January 2013 Final Rule, the Bureau 
estimated litigation costs under the ability-to-repay standards for 
non-QM loans. The Bureau concluded that to reflect the expected value 
of these litigation costs, the costs of non-QM loans would increase by 
10 basis points or $212 for a $210,000 loan.\187\ However, the 
estimates set forth in the January 2013 Final Rule do not predict 
changes in costs from Baseline 1 on non-QM loans that obtain QM status 
by seasoning or on the remaining non-QM loans. In response to the 
Seasoned QM Proposal, the Bureau did not receive comments on methods or 
data that would allow the Bureau to quantify potential changes in 
costs.
---------------------------------------------------------------------------

    \187\ One commenter contrasted the proposal's analysis with that 
from the January 2013 Final Rule, 78 FR 6408, 6569 (Jan. 30, 2013). 
The 2013 analysis's conclusion of a 10 basis point and $212 cost 
associated with non-QM litigation risk came from three assumptions: 
1.5 percent of loans would foreclose, 20 percent of consumers who 
entered foreclosure would claim violations of ATR as a defense, and 
consumers would succeed 20 percent of the time. As noted previously, 
to the Bureau's knowledge there has been a single ATR claim made in 
litigation, a rate of litigation far smaller than that implied by 
the assumptions. The Bureau cannot reliably forecast the rate of ATR 
defenses in foreclosure litigation under expanded non-QM lending 
that would arise if litigation risk were curtailed.
---------------------------------------------------------------------------

Benefits to Covered Persons From Market Expansion
    The Bureau's analysis of the NMDB holds constant the quantity and 
composition of loans. However, creditors could potentially gain from 
originating loans that would not be profitable without this final rule. 
Such loans may be directly more profitable because they are less costly 
due to the decreased litigation risk discussed in the previous section. 
Among these loans, loans that achieve a stronger presumption of 
compliance via seasoning may also be indirectly more profitable because 
they can more easily be sold on the secondary market, creating 
liquidity for creditors. Increased liquidity may come from both

[[Page 86449]]

loans that were non-QM from origination and loans that achieved a safe 
harbor by fulfilling the portfolio requirements of the EGRRCPA. The 
Assessment Report found that while non-depository institutions sold 
non-QM loans on the secondary market, almost all surveyed depository 
institutions kept non-QM loans in their portfolio.
    Altogether, the Bureau cannot reliably predict how many additional 
loans would be originated under this final rule's additional incentives 
and subsequently how much potential profit creditors would accrue 
relative to either baseline.\188\ In the Seasoned QM Proposal, the 
Bureau sought comment as to whether these effects could be ascertained 
but received no additional data to quantify the effects. One academic 
commenter expressed skepticism that the proposal would provide enough 
incentive to generate more non-QM lending because lenders would still 
be potentially liable for ATR violations in the first three years. 
However, several industry commenters indicated that they would increase 
non-QM lending as a result of this final rule.
---------------------------------------------------------------------------

    \188\ Assessment Report, supra note 47, at 117. In the 
Assessment Report, the Bureau estimated that the ATR/QM Rule 
eliminated between 63 and 70 percent of non-GSE eligible, high DTI 
loans for home purchase over the period of 2014 to 2016, accounting 
for 9,000 to 12,000 loans. The Bureau does not believe it can 
reliably estimate whether the number of additional loans would be 
less than, the same as, or more than those that the Assessment 
Report found were lost as a result of the ATR/QM Rule. The pool of 
loans analyzed in the Assessment Report is somewhat different from 
the 150,628 loans in Baseline 1 that would meet all of the 
requirements at consummation for Seasoned QMs derived above, and the 
benefit of seasoning would vary across these loans.
---------------------------------------------------------------------------

Other Costs to Covered Persons
    The Bureau concludes that this final rule will not directly impose 
additional costs to creditors relative to the baseline. This final rule 
offers a pathway for performing mortgages to gain a safe harbor 
presumption. Loans meeting this final rule's Seasoned QM definition 
will have at least as much of a presumption of compliance as under 
either baseline. However, if this final rule succeeds in expanding non-
QM loans originations by causing new creditors to enter the market for 
non-QM loans, existing creditors' profits may be eroded by competitive 
pressures.
2. Benefits and Costs to Consumers
    Consumers will primarily benefit from this final rule indirectly 
via the potential expansion of rebuttable presumption and non-QM loans 
originated due to decreased litigation risk to creditors. As noted in 
the January 2013 Final Rule, increased legal certainty may benefit 
consumers if it encourages creditors to make loans that satisfy the QM 
criteria, as such loans cannot have certain risky features and have a 
cap on upfront costs. Furthermore, increased certainty may result in 
loans with a lower cost than would be charged in a context of legal 
uncertainty. Thus, a safe harbor may also allow creditors to provide 
consumers additional or more affordable access to credit by reducing 
their expected total litigation costs. Applied here, for consumers that 
choose to pursue high APR loans without safe harbor QM status at 
origination, borrowing may be cheaper or more widely available relative 
to either baseline. However, the Bureau cannot ascertain the additional 
number of consumers who would choose loans without safe harbor QM 
status under this final rule relative to the baselines as stated in the 
previous section.
    Consumers who would select loans without safe harbor QM status 
under either baseline and this final rule may or may not benefit from 
this final rule. On the one hand, decreased litigation risk may 
translate into lower costs in competitive mortgage markets.\189\ 
However, decreased litigation risk for creditors would come from 
limiting the ability of consumers who make payments throughout the 
seasoning period to raise violations of ATR requirements as defenses, 
should they enter foreclosure after the third year. The Bureau neither 
has the data to estimate consumers' value of using such violations in 
foreclosure defense, nor to estimate this final rule's potential to 
decrease loan prices.
---------------------------------------------------------------------------

    \189\ One academic study examined how lower secondary market 
costs passed through to consumers in markets with different amounts 
of competition. David S. Scharfstein & Adi Sunderam, Market Power in 
Mortgage Lending and the Transmission of Monetary Policy, Mimeo 
(Aug. 2016), https://www.hbs.edu/faculty/Publication%20Files/Market%20Power%20in%20Mortgage%20Lending%20and%20the%20Transmission%20of%20Monetary%20Policy_8d6596e6-e073-4d11-83da-3ae1c6db6c28.pdf.
---------------------------------------------------------------------------

    Several industry commenters suggested that workers who earn income 
via sources not reportable on W-2 forms (e.g., self-employed or gig 
economy workers) would potentially benefit from expanded access to 
credit. Others argued that ATR arguments in foreclosure defense can be 
pivotal to the outcome of individual cases, and thus very valuable to 
individual consumers, but that in aggregate, there is not enough 
foreclosure litigation to substantially lower costs that would be 
passed on to consumers en masse. Even in markets where mortgage lending 
is competitive and cost savings are passed to consumers, evaluating the 
benefits to consumers in the form of increased access to credit against 
the costs to consumers in terms of eliminating potentially winning 
arguments in foreclosure defense requires information on how consumers 
and creditors value litigation risk. The Bureau is not aware of data 
that would allow it to quantify how consumers and creditors value 
litigation risk, and the commenters did not offer supplementary 
evidence to quantify those effects.
3. Consideration of Alternatives
    The Bureau considered alternative seasoning periods of various 
numbers of years and alternative performance requirements of various 
numbers of allowable 30-day delinquencies. None of the alternatives 
permits 60-day delinquencies. The Bureau assesses each alternative 
along two different measures: (1) The estimated fraction of loans that 
would be originated as non-QM or rebuttable presumption QM loans in 
each baseline that would satisfy the performance requirements; and (2) 
the differences in foreclosure start rates between those loans that 
would gain safe harbor status and those that were safe harbor at 
consummation.
    Mirroring the approach of the foreclosure analysis in part VIII.B.1 
above, the Bureau analyzes the same data on conventional, fixed-rate, 
first-lien purchase and refinance mortgage loans without prohibited 
features that were originated in 2012 and 2013 and held privately in 
portfolio at consummation. The analyses of alternatives also make the 
same assumptions on how loans with certain characteristics can obtain 
safe harbor status and hold constant the quantity and composition of 
the loans. Specifically, the consideration of alternatives is similar 
to the analysis of this final rule in that the Bureau cannot reliably 
predict how many additional loans would have been originated under its 
alternatives.

[[Page 86450]]



Table 5--Percentage of Potentially Seasonable Loans Under Baseline 1 That Would Have Satisfied This Final Rule's
     Seasoned QM Performance Criteria Under Alternative Seasoning Periods and Allowable 30-Day Delinquencies
----------------------------------------------------------------------------------------------------------------
                                                           Allowable 30-day delinquencies
                                   -----------------------------------------------------------------------------
    Seasoning period  (months)           0            1            2            3            4            5
                                     (percent)    (percent)    (percent)    (percent)    (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
12................................         91.7         93.1         93.9         94.3         94.4         94.5
24................................         79.5         81.3         82.4         82.8         83.0         83.4
36................................         68.1         70.4         71.3         71.7         72.2         72.5
48................................         57.3         59.7         60.7         61.3         61.7         61.9
60................................         47.7         49.7         50.7         51.4         51.8         52.1
----------------------------------------------------------------------------------------------------------------

    Table 5 reports the fraction of loans originated as either non-QM 
or rebuttable presumption QM loans under the General QM standards of 
Baseline 1 that would have met the seasoning requirements under various 
alternatives. Allowing for different 30-day delinquencies has modest 
effects on the fraction of loans that would have seasoned. In contrast, 
varying the seasoning period from 12 months to 60 months captures 
vastly different numbers of loans that would have seasoned.
    Some industry commenters noted that similar analyses of 
alternatives in the Seasoned QM Proposal showed only minor differences 
in the estimated fraction of seasonable loans that meet the performance 
criteria under two, three, or four 30-day delinquencies. Accordingly, 
the commenters suggested increasing the number of allowable 30-day 
delinquencies. The Bureau interprets the same data to suggest that 
there also would be little benefit in terms of access to credit from 
expanding the proposed performance criteria to allow more delinquencies 
and encompass more loans. Instead, inconsistent repayment reflected in 
more than two 30-day delinquencies could signal borrower distress or 
difficulties with ability to repay that do not necessarily culminate in 
foreclosure.

 Table 6--Difference in Percentage Points of Loans Under Baseline 1 That Entered Foreclosure Between Potentially
  Seasonable Loans That Meet This Final Rule's Seasoned QM Performance Criteria and Loans That Had Safe Harbor
                From Consummation and Were Open and Had Not Entered Foreclosure After Three Years
----------------------------------------------------------------------------------------------------------------
                                                           Allowable 30-day delinquencies
    Seasoning period  (months)     -----------------------------------------------------------------------------
                                         0            1            2            3            4            5
----------------------------------------------------------------------------------------------------------------
12................................         1.00         1.13         1.31         1.38         1.41         1.41
24................................         0.56         0.61         0.74         0.78         0.82         0.90
36................................         0.32         0.46         0.47         0.49         0.51         0.53
48................................         0.10         0.20         0.23         0.25         0.25         0.27
60................................        -0.07         0.00         0.03         0.06         0.06         0.06
----------------------------------------------------------------------------------------------------------------

    Varying the number of allowable 30-day delinquencies does have some 
impact on foreclosure risk. Table 6 reports the difference in the share 
of foreclosures among loans that would have qualified for Seasoned QM 
status under this final rule with the share of foreclosures among loans 
that would have been originated as safe harbor QM loans under Baseline 
1. For example, under this final rule, among loans that were open for 
at least three years, the Bureau estimates that with a performance 
standard of no more than two 30-day delinquencies, 0.47 of a percentage 
point more Seasoned QMs would enter foreclosure proceedings than would 
loans that had safe harbor status from consummation.
    Holding constant the seasoning period, decreasing the number of 
allowable 30-day delinquencies by one decreases the differences in 
foreclosure share between loans that would have seasoned and loans that 
were safe harbor QM loans from origination by approximately 4 percent. 
Similarly, increasing the number of allowed 30-day delinquencies by one 
increases the difference by approximately 4 percent. Changing the 
length of the seasoning period generally has a larger effect on the 
relative foreclosure start rate than does changing the number of 
allowable 30-day delinquencies.

Table 7--Percentage of Potentially Seasonable Loans Under Baseline 2 That Would Have Satisfied This Final Rule's
     Seasoned QM Performance Criteria Under Alternative Seasoning Periods and Allowable 30-Day Delinquencies
----------------------------------------------------------------------------------------------------------------
                                                      Allowable 30-day delinquencies--(percent)
    Seasoning period  (months)     -----------------------------------------------------------------------------
                                         0            1            2            3            4            5
----------------------------------------------------------------------------------------------------------------
12................................         96.3         96.5         96.7         96.7         96.7         96.7
24................................         91.1         91.6         91.8         92.2         92.2         92.2
36................................         83.3         84.6         84.6         84.6         84.8         84.8
48................................         76.1         77.6         77.6         77.6         77.8         77.8
60................................         71.0         72.6         72.6         72.8         73.0         73.0
----------------------------------------------------------------------------------------------------------------


[[Page 86451]]

    Table 7 repeats the analysis of Table 5 using Baseline 2. A larger 
fraction of loans--about 13 percentage points--originated as either 
non-QM or rebuttable presumption QM loans under the General QM 
standards would have met the seasoning requirements under this final 
rule. This reflects the fact that not only are there significantly more 
non-QM loans under Baseline 2 than under Baseline 1 but also that the 
additional non-QM loans have relatively stronger credit characteristics 
at consummation. The amendments to the General QM loan definition will 
provide many of these loans with a pathway to QM status.

 Table 8--Difference in Percentage Points of Loans Under Baseline 2 That Entered Foreclosure Between Potentially
  Seasonable Loans That Meet This Final Rule's Seasoned QM Performance Criteria and Loans That Had Safe Harbor
                From Consummation and Were Open and Had Not Entered Foreclosure After Three Years
----------------------------------------------------------------------------------------------------------------
                                                           Allowable 30-day delinquencies
    Seasoning period  (months)     -----------------------------------------------------------------------------
                                         0            1            2            3            4            5
----------------------------------------------------------------------------------------------------------------
12................................         0.06         0.06         0.26         0.26         0.26         0.26
24................................         0.08         0.08         0.08         0.08         0.08         0.08
36................................         0.13         0.13         0.13         0.13         0.13         0.13
48................................        -0.09        -0.09        -0.09        -0.09        -0.09        -0.09
60................................        -0.09        -0.09        -0.09        -0.09        -0.09        -0.09
----------------------------------------------------------------------------------------------------------------

    Table 8 shows that under Baseline 2, non-QM and rebuttable 
presumption QM loans that would have achieved safe harbor status 
through this final rule or alternatives with a seasoning period of at 
least three years have a 0.13 percentage point higher foreclosure start 
rate than open loans that were safe harbor QM loans at consummation. 
The difference in the foreclosure start rates does not dramatically 
vary with different numbers of allowable 30-day delinquencies.

C. Potential Impact on Depository Institutions and Credit Unions With 
$10 Billion or Less in Total Assets, as Described in Section 1026

    Depository institutions and credit unions that are also creditors 
making covered loans (depository creditors) with $10 billion or less in 
total assets are expected to benefit from this final rule. As stated 
above, under each baseline, smaller institutions can originate Small 
Creditor QM loans or QM loans under the requirements of the EGRRCPA. 
Thus, they will likely not benefit from this final rule's providing a 
pathway to safe harbor status for non-QM loans, but they will benefit 
from the pathway to safe harbor status for rebuttable presumption QM 
loans. As a result of this final rule, certain loans that have a safe 
harbor from origination from the EGRRCPA would not have to continue to 
be held in portfolio after the seasoning period to maintain that safe 
harbor status if they meet the requirements to be a Seasoned QM.

D. Potential Impact on Rural Areas

    As with the analysis of this final rule's benefits and costs 
overall, the Bureau can generally not predict how much or how little 
this final rule will cause the market in rural areas to expand under 
either Baseline 1 or Baseline 2. The Bureau analyzed HMDA data 
mirroring the description of the baselines in part VIII.A.2, continuing 
to assume that loans continue to be originated under each baseline with 
the same characteristics. Under Baseline 1, relatively more loans in 
rural areas than in urban areas will achieve only a stronger 
presumption of compliance or relief from portfolio retention 
requirements by meeting the performance criteria of this final rule. 
This share of loans is 9 percent for rural markets relative to 5 
percent of the market overall. The rural share includes relatively more 
loans that do not meet the portfolio requirements under the EGRRCPA 
that will be either rebuttable presumption QMs under the revised 
General QM loan definition's requirements or non-QM (7.9 percent vs. 
4.0 percent) and loans that will meet the portfolio and other 
requirements under the EGRRCPA (1.5 percent vs. 0.7 percent).
    However, under Baseline 2, the difference in the share of 
potentially seasonable loans between rural areas (27.5 percent) and the 
market as a whole (27.8 percent) is relatively modest. This reflects 
relatively fewer loans being originated without QM status or with a 
rebuttable presumption that would gain the stronger presumption of 
compliance of safe harbor if they met the performance requirements of 
this final rule than under Baseline 2 alone (22.8 percent vs. 24.2 
percent) and relatively more that were originated under the EGRRCPA QM 
definition and could potentially gain relief from the portfolio 
requirements (4.7 percent vs. 3.7 percent).

IX. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA),\190\ as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996,\191\ requires 
each agency to consider the potential impact of its regulations on 
small entities, including small businesses, small governmental units, 
and small not-for-profit organizations. The RFA defines a ``small 
business'' as a business that meets the size standard developed by the 
Small Business Administration pursuant to the Small Business Act.\192\
---------------------------------------------------------------------------

    \190\ 5 U.S.C. 601 et seq.
    \191\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
    \192\ 5 U.S.C. 601(3) (stating also that the Bureau may 
establish an alternative definition after consultation with the 
Small Business Administration and an opportunity for public 
comment).
---------------------------------------------------------------------------

    The RFA generally requires an agency to conduct an initial 
regulatory flexibility analysis (IRFA) and a final regulatory 
flexibility analysis (FRFA) of any rule subject to notice-and-comment 
rulemaking requirements, unless the agency certifies that the rule 
would not have a significant economic impact on a substantial number of 
small entities (SISNOSE).\193\ The Bureau also is subject to certain 
additional procedures under the RFA involving the convening of a panel 
to consult with small business representatives before proposing a rule 
for which an IRFA is required.\194\
---------------------------------------------------------------------------

    \193\ 5 U.S.C. 603 through 605.
    \194\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    Neither an IRFA nor a small business review panel was required for 
the proposal, because the Director certified that the proposal, if 
adopted, would not have a SISNOSE.
    Similarly, a FRFA is not required for this final rule, because this 
final rule will not have a SISNOSE. The Bureau

[[Page 86452]]

does not expect that this final rule will impose costs on small 
entities relative to any of the baselines. This final rule defines a 
new category of QMs. All methods of compliance with the ATR 
requirements under a particular baseline will remain available to small 
entities under this final rule. Thus, a small entity that is in 
compliance with the rules under a given baseline will not need to take 
any different or additional action under this final rule.
    Accordingly, the Director certifies that this final rule will not 
have a SISNOSE.

X. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA),\195\ Federal 
agencies are generally required to seek, prior to implementation, 
approval from the Office of Management and Budget (OMB) for information 
collection requirements. Under the PRA, the Bureau may not conduct or 
sponsor, and, notwithstanding any other provision of law, a person is 
not required to respond to, an information collection unless the 
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------

    \195\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Bureau has determined that this final rule does not contain any 
new or substantively revised information collection requirements other 
than those previously approved by OMB under OMB control number 3170-
0015. This final rule will amend 12 CFR part 1026 (Regulation Z), which 
implements TILA. OMB control number 3170-0015 is the Bureau's OMB 
control number for Regulation Z.

XI. Congressional Review Act

    Pursuant to the Congressional Review Act,\196\ the Bureau will 
submit a report containing this rule and other required information to 
the U.S. Senate, the U.S. House of Representatives, and the Comptroller 
General of the United States prior to the rule's published effective 
date. The Office of Information and Regulatory Affairs has designated 
this rule as not a ``major rule'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \196\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

XII. Signing Authority

    The Director of the Bureau, Kathleen L. Kraninger, having reviewed 
and approved this document, is delegating the authority to 
electronically sign this document to Grace Feola, a Bureau Federal 
Register Liaison, for purposes of publication in the Federal Register.

List of Subjects in 12 CFR Part 1026

    Advertising, Banks, banking, Consumer protection, Credit, Credit 
unions, Mortgages, National banks, Reporting and recordkeeping 
requirements, Savings associations, Truth-in-lending.

Authority and Issuance

    For the reasons set forth above, the Bureau amends Regulation Z, 12 
CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Amend Sec.  1026.43 by revising paragraphs (e)(1) and (e)(2) 
introductory text and adding paragraph (e)(7) to read as follows:


Sec.  1026.43  Minimum standards for transactions secured by a 
dwelling.

* * * * *
    (e) Qualified mortgages--(1) Safe harbor and presumption of 
compliance--(i) Safe harbor for loans that are not higher-priced 
covered transactions and for seasoned loans. A creditor or assignee of 
a qualified mortgage complies with the repayment ability requirements 
of paragraph (c) of this section if:
    (A) The loan is a qualified mortgage as defined in paragraph 
(e)(2), (4), (5), (6), or (f) of this section that is not a higher-
priced covered transaction, as defined in paragraph (b)(4) of this 
section; or
    (B) The loan is a qualified mortgage as defined in paragraph (e)(7) 
of this section, regardless of whether the loan is a higher-priced 
covered transaction.
* * * * *
    (2) Qualified mortgage defined--general. Except as provided in 
paragraph (e)(4), (5), (6), (7), or (f) of this section, a qualified 
mortgage is a covered transaction:
* * * * *
    (7) Qualified mortgage defined--seasoned loans--(i) General. 
Notwithstanding paragraph (e)(2) of this section, and except as 
provided in paragraph (e)(7)(iv) of this section, a qualified mortgage 
is a first-lien covered transaction that:
    (A) Is a fixed-rate mortgage as defined in Sec.  1026.18(s)(7)(iii) 
with fully amortizing payments as defined in paragraph (b)(2) of this 
section;
    (B) Satisfies the requirements in paragraphs (e)(2)(i) through (v) 
of this section;
    (C) Has met the requirements in paragraph (e)(7)(ii) of this 
section at the end of the seasoning period as defined in paragraph 
(e)(7)(iv)(C) of this section;
    (D) Satisfies the requirements in paragraph (e)(7)(iii) of this 
section; and
    (E) Is not a high-cost mortgage as defined in Sec.  1026.32(a).
    (ii) Performance requirements. To be a qualified mortgage under 
this paragraph (e)(7) of this section, the covered transaction must 
have no more than two delinquencies of 30 or more days and no 
delinquencies of 60 or more days at the end of the seasoning period.
    (iii) Portfolio requirements. To be a qualified mortgage under this 
paragraph (e)(7) of this section, the covered transaction must satisfy 
the following requirements:
    (A) The covered transaction is not subject, at consummation, to a 
commitment to be acquired by another person, except for a sale, 
assignment, or transfer permitted by paragraph (e)(7)(iii)(B)(3) of 
this section; and
    (B) Legal title to the covered transaction is not sold, assigned, 
or otherwise transferred to another person before the end of the 
seasoning period, except that:
    (1) The covered transaction may be sold, assigned, or otherwise 
transferred to another person pursuant to a capital restoration plan or 
other action under 12 U.S.C. 1831o, actions or instructions of any 
person acting as conservator, receiver, or bankruptcy trustee, an order 
of a State or Federal government agency with jurisdiction to examine 
the creditor pursuant to State or Federal law, or an agreement between 
the creditor and such an agency;
    (2) The covered transaction may be sold, assigned, or otherwise 
transferred pursuant to a merger of the creditor with another person or 
acquisition of the creditor by another person or of another person by 
the creditor; or
    (3) The covered transaction may be sold, assigned, or otherwise 
transferred once before the end of the seasoning period, provided that 
the covered transaction is not securitized as part of the sale, 
assignment, or transfer or at any other time before the end of the 
seasoning period as defined in Sec.  1026.43(e)(7)(iv)(C).
    (iv) Definitions. For purposes of paragraph (e)(7) of this section:
    (A) Delinquency means the failure to make a periodic payment (in 
one full payment or in two or more partial payments) sufficient to 
cover principal,

[[Page 86453]]

interest, and escrow (if applicable) for a given billing cycle by the 
date the periodic payment is due under the terms of the legal 
obligation. Other amounts, such as any late fees, are not considered 
for this purpose.
    (1) A periodic payment is 30 days delinquent when it is not paid 
before the due date of the following scheduled periodic payment.
    (2) A periodic payment is 60 days delinquent if the consumer is 
more than 30 days delinquent on the first of two sequential scheduled 
periodic payments and does not make both sequential scheduled periodic 
payments before the due date of the next scheduled periodic payment 
after the two sequential scheduled periodic payments.
    (3) For any given billing cycle for which a consumer's payment is 
less than the periodic payment due, a consumer is not delinquent as 
defined in this paragraph (e)(7) if:
    (i) The servicer chooses not to treat the payment as delinquent for 
purposes of any section of subpart C of Regulation X, 12 CFR part 1024, 
if applicable;
    (ii) The payment is deficient by $50 or less; and
    (iii) There are no more than three such deficient payments treated 
as not delinquent during the seasoning period.
    (4) The principal and interest used in determining the date a 
periodic payment sufficient to cover principal, interest, and escrow 
(if applicable) for a given billing cycle becomes due and unpaid are 
the principal and interest payment amounts established by the terms and 
payment schedule of the loan obligation at consummation, except:
    (i) If a qualifying change as defined in paragraph (e)(7)(iv)(B) of 
this section is made to the loan obligation, the principal and interest 
used in determining the date a periodic payment sufficient to cover 
principal, interest, and escrow (if applicable) for a given billing 
cycle becomes due and unpaid are the principal and interest payment 
amounts established by the terms and payment schedule of the loan 
obligation at consummation as modified by the qualifying change.
    (ii) If, due to reasons related to the timing of delivery, set up, 
or availability for occupancy of the dwelling securing the obligation, 
the first payment due date is modified before the first payment due 
date in the legal obligation at consummation, the modified first 
payment due date shall be considered in lieu of the first payment due 
date in the legal obligation at consummation in determining the date a 
periodic payment sufficient to cover principal, interest, and escrow 
(if applicable) for a given billing cycle becomes due and unpaid.
    (5) Except for purposes of making up the deficiency amount set 
forth in paragraph (e)(7)(iv)(A)(3)(ii) of this section, payments from 
the following sources are not considered in assessing delinquency under 
paragraph (e)(7)(iv)(A) of this section:
    (i) Funds in escrow in connection with the covered transaction; or
    (ii) Funds paid on behalf of the consumer by the creditor, 
servicer, or assignee of the covered transaction, or any other person 
acting on behalf of such creditor, servicer, or assignee.
    (B) Qualifying change means an agreement that meets the following 
conditions:
    (1) The agreement is entered into during or after a temporary 
payment accommodation in connection with a disaster or pandemic-related 
national emergency as defined in paragraph (e)(7)(iv)(D) of this 
section and ends any pre-existing delinquency on the loan obligation 
upon taking effect;
    (2) The amount of interest charged over the full term of the loan 
does not increase as a result of the agreement;
    (3) The servicer does not charge any fee in connection with the 
agreement; and
    (4) Promptly upon the consumer's acceptance of the agreement, the 
servicer waives all late charges, penalties, stop payment fees, or 
similar charges incurred during a temporary payment accommodation in 
connection with a disaster or pandemic-related national emergency, as 
well as all late charges, penalties, stop payment fees, or similar 
charges incurred during the delinquency that led to a temporary payment 
accommodation in connection with a disaster or pandemic-related 
national emergency.
    (C) Seasoning period means a period of 36 months beginning on the 
date on which the first periodic payment is due after consummation of 
the covered transaction, except that:
    (1) Notwithstanding any other provision of this section, if there 
is a delinquency of 30 days or more at the end of the 36th month of the 
seasoning period, the seasoning period does not end until there is no 
delinquency; and
    (2) The seasoning period does not include any period during which 
the consumer is in a temporary payment accommodation extended in 
connection with a disaster or pandemic-related national emergency, 
provided that during or at the end of the temporary payment 
accommodation there is a qualifying change as defined in paragraph 
(e)(7)(iv)(B) of this section or the consumer cures the loan's 
delinquency under its original terms. If during or at the end of the 
temporary payment accommodation in connection with a disaster or 
pandemic-related national emergency there is a qualifying change or the 
consumer cures the loan's delinquency under its original terms, the 
seasoning period consists of the period from the date on which the 
first periodic payment was due after consummation of the covered 
transaction to the beginning of the temporary payment accommodation and 
an additional period immediately after the temporary payment 
accommodation ends, which together must equal at least 36 months.
    (D) Temporary payment accommodation in connection with a disaster 
or pandemic-related national emergency means temporary payment relief 
granted to a consumer due to financial hardship caused directly or 
indirectly by a presidentially declared emergency or major disaster 
under the Robert T. Stafford Disaster Relief and Emergency Assistance 
Act (42 U.S.C. 5121 et seq.) or a presidentially declared pandemic-
related national emergency under the National Emergencies Act (50 
U.S.C. 1601 et seq.).
* * * * *

0
3. In supplement I to part 1026--Official Interpretations, under 
Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling:
0
a. Revise 43(e)(1) Safe harbor and presumption of compliance;
0
b. Remove 43(e)(1)(i) Safe harbor for transactions that are not higher-
priced covered transactions;
0
c. Add 43(e)(1)(i)(A) Safe harbor for transactions that are not higher-
priced covered transactions;
0
d. Add the heading 43(e)(7) Seasoned Loans and add paragraphs 
43(e)(7)(i)(A), 43(e)(7)(iii), 43(e)(7)(iv)(A), 43(e)(7)(iv)(A)(2), 
43(e)(7)(iv)(B), 43(e)(7)(iv)(C)(2), and 43(e)(7)(iv)(D) after 
paragraph 43(e)(5).
    The revision and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *
    Section 1026.43--Minimum Standards for Transactions Secured by a 
Dwelling
* * * * *
    43(e)(1) Safe harbor and presumption of compliance.
    1. General. Section 1026.43(c) requires a creditor to make a 
reasonable and good faith determination at or before consummation that 
a consumer will be able to repay a covered transaction. Section 
1026.43(e)(1)(i) and

[[Page 86454]]

(ii) provide a safe harbor or presumption of compliance, respectively, 
with the repayment ability requirements of Sec.  1026.43(c) for 
creditors and assignees of covered transactions that satisfy the 
requirements of a qualified mortgage under Sec.  1026.43(e)(2), (4), 
(5), (6), (7), or (f). See Sec.  1026.43(e)(1)(i) and (ii) and 
associated commentary.
    43(e)(1)(i)(A) Safe harbor for transactions that are not higher-
priced covered transactions.
    1. Higher-priced covered transactions. For guidance on determining 
whether a loan is a higher-priced covered transaction, see comments 
43(b)(4)-1 through -3.
* * * * *
    43(e)(7) Seasoned loans.
Paragraph 43(e)(7)(i)(A)
    1. Fixed-rate mortgage. Section 1026.43(e)(7)(i)(A) provides that, 
for a covered transaction to become a qualified mortgage under Sec.  
1026.43(e)(7), the covered transaction must be a fixed-rate mortgage, 
as defined in Sec.  1026.18(s)(7)(iii). Under Sec.  1026.18(s)(7)(iii), 
the term ``fixed-rate mortgage'' means a transaction secured by real 
property or a dwelling that is not an adjustable-rate mortgage or a 
step-rate mortgage. Thus, a covered transaction that is an adjustable-
rate mortgage or step-rate mortgage is not eligible to become a 
qualified mortgage under Sec.  1026.43(e)(7).
    2. Fully amortizing payments. Section 1026.43(e)(7)(i)(A) provides 
that for a covered transaction to become a qualified mortgage as a 
seasoned loan under Sec.  1026.43(e)(7), a mortgage must meet certain 
product requirements and be a fixed-rate mortgage with fully amortizing 
payments. Only loans for which the scheduled periodic payments do not 
require a balloon payment, as defined in Sec.  1026.18(s), to fully 
amortize the loan within the loan term can become seasoned loans for 
the purposes of Sec.  1026.43(e)(7). However, Sec.  1026.43(e)(7)(i)(A) 
does not prohibit a qualifying change as defined in Sec.  
1026.43(e)(7)(iv)(B) that is entered into during or after a temporary 
payment accommodation in connection with a disaster or pandemic-related 
national emergency, even if such a qualifying change involves a balloon 
payment or lengthened loan term.
Paragraph 43(e)(7)(iii)
    1. Requirement to hold in portfolio. For a covered transaction to 
become a qualified mortgage under Sec.  1026.43(e)(7), a creditor 
generally must hold the transaction in portfolio until the end of the 
seasoning period, subject to the exceptions set forth in Sec.  
1026.43(e)(7)(iii)(B)(1) through (3). Unless one of these exceptions 
applies, a covered transaction cannot become a qualified mortgage as a 
seasoned loan under Sec.  1026.43(e)(7) if legal title to the debt 
obligation is sold, assigned, or otherwise transferred to another 
person before the end of the seasoning period.
    2. Application to subsequent transferees. The exception contained 
in Sec.  1026.43(e)(7)(iii)(B)(3) may be used only one time for a 
covered transaction. The exceptions contained in Sec.  
1026.43(e)(7)(iii)(B)(1) and (2) apply not only to an initial sale, 
assignment, or other transfer by the originating creditor but to 
subsequent sales, assignments, and other transfers as well. For 
example, assume Creditor A originates a covered transaction that is not 
a qualified mortgage at origination. Six months after consummation, the 
covered transaction is transferred to Creditor B pursuant to Sec.  
1026.43(e)(7)(iii)(B)(3). The transfer does not fail to comply with the 
requirements in Sec.  1026.43(e)(7)(iii) because the loan is not 
securitized as part of the transfer or at any other time before the end 
of the seasoning period. If Creditor B sells the covered transaction 
before the end of the seasoning period, the covered transaction is not 
eligible to season into a qualified mortgage under Sec.  1026.43(e)(7) 
unless the sale falls within an exception set forth in Sec.  
1026.43(e)(7)(iii)(B)(1) or (2) (i.e., the transfer is required by 
supervisory action or pursuant to a merger or acquisition).
    3. Supervisory sales. Section 1026.43(e)(7)(iii)(B)(1) facilitates 
sales that are deemed necessary by supervisory agencies to revive 
troubled creditors and resolve failed creditors. A covered transaction 
does not violate the requirements in Sec.  1026.43(e)(7)(iii) if it is 
sold, assigned, or otherwise transferred to another person before the 
end of the seasoning period pursuant to: A capital restoration plan or 
other action under 12 U.S.C. 1831o; the actions or instructions of any 
person acting as conservator, receiver or bankruptcy trustee; an order 
of a State or Federal government agency with jurisdiction to examine 
the creditor pursuant to State or Federal law; or an agreement between 
the creditor and such an agency. Section 1026.43(e)(7)(iii)(B)(1) does 
not apply to transfers done to comply with a generally applicable 
regulation with future effect designed to implement, interpret, or 
prescribe law or policy in the absence of a specific order by or a 
specific agreement with a governmental agency described in Sec.  
1026.43(e)(7)(iii)(B)(1) directing the sale of one or more covered 
transactions held by the creditor or one of the other circumstances 
listed in Sec.  1026.43(e)(7)(iii)(B)(1). For example, a covered 
transaction does not violate the requirements in Sec.  
1026.43(e)(7)(iii) if the covered transaction is sold pursuant to a 
capital restoration plan under 12 U.S.C. 1831o before the end of 
seasoning period. However, if the creditor simply chose to sell the 
same covered transaction as one way to comply with general regulatory 
capital requirements in the absence of supervisory action or agreement, 
then the covered transaction cannot become a qualified mortgage as a 
seasoned loan under Sec.  1026.43(e)(7), unless the sale met the 
requirements of Sec.  1026.43(e)(7)(iii)(B)(3) or the covered 
transaction qualifies under another definition of qualified mortgage.
Paragraph 43(e)(7)(iv)(A)
    1. Due date. In determining whether a scheduled periodic payment is 
delinquent for purposes of Sec.  1026.43(e)(7), the due date is the 
date the payment is due under the terms of the legal obligation, 
without regard to whether the consumer is afforded a period after the 
due date to pay before the servicer assesses a late fee.
Paragraph 43(e)(7)(iv)(A)(2)
    1. 60 days delinquent. The following example illustrates the 
meaning of 60 days delinquent for purposes of Sec.  1026.43(e)(7). 
Assume a loan is consummated on October 15, 2022, that the consumer's 
periodic payment is due on the 1st of each month, and that the consumer 
timely made the first periodic payment due on December 1, 2022. For 
purposes of Sec.  1026.43(e)(7), the consumer is 30 days delinquent if 
the consumer fails to make a payment (sufficient to cover the scheduled 
January 1, 2023 periodic payment of principal, interest, and escrow (if 
applicable)) before February 1, 2023. For purposes of Sec.  
1026.43(e)(7), the consumer is 60 days delinquent if the consumer then 
fails to make two payments (sufficient to cover the scheduled January 
1, 2023 and February 1, 2023 periodic payments of principal, interest, 
and escrow (if applicable)) before March 1, 2023.
Paragraph 43(e)(7)(iv)(B)
    1. Qualifying change. An agreement that meets the conditions 
specified in Sec.  1026.43(e)(7)(iv)(B) is a qualifying change even if 
it is not in writing.

[[Page 86455]]

Paragraph 43(e)(7)(iv)(C)(2)
    1. Suspension of seasoning period during certain temporary payment 
accommodations. Section 1026.43(e)(7)(iv)(C)(2) provides that the 
seasoning period does not include any period during which the consumer 
is in a temporary payment accommodation extended in connection with a 
disaster or pandemic-related national emergency, provided that during 
or at the end of the temporary payment accommodation there is a 
qualifying change as defined in Sec.  1026.43(e)(7)(iv)(B) or the 
consumer cures the loan's delinquency under its original terms. Section 
1026.43(e)(7)(iv)(C)(2) further explains that, under these 
circumstances, the seasoning period consists of the period from the 
date on which the first periodic payment was due after origination of 
the covered transaction to the beginning of the temporary payment 
accommodation and an additional period immediately after the temporary 
payment accommodation ends, which together must equal at least 36 
months. For example, assume the consumer enters into a covered 
transaction for which the first periodic payment is due on March 1, 
2022, and the consumer enters a three-month temporary payment 
accommodation in connection with a disaster or pandemic-related 
national emergency, effective March 1, 2023. Assume further that the 
consumer misses the March 1, April 1, and May 1, 2023 periodic payments 
during the temporary payment accommodation period, but enters into a 
qualifying change as defined in Sec.  1026.43(e)(7)(iv)(B) on June 1, 
2023, and is not delinquent on June 1, 2023. Under these circumstances, 
the seasoning period consists of the period from March 1, 2022 to 
February 28, 2023 and the period from June 1, 2023 to May 31, 2025, 
assuming the consumer is not 30 days or more delinquent on May 31, 
2025.
Paragraph 43(e)(7)(iv)(D)
    1. Temporary payment accommodation in connection with a disaster or 
pandemic-related national emergency. For purposes of Sec.  
1026.43(e)(7), examples of temporary payment accommodations in 
connection with a disaster or pandemic-related national emergency 
include, but are not limited to a trial loan modification plan, a 
temporary payment forbearance program, or a temporary repayment plan.
* * * * *

    Dated: December 10, 2020.
Grace Feola,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-27571 Filed 12-21-20; 4:15 pm]
BILLING CODE 4810-AM-P