86308 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

1 85 FR 41448 (July 10, 2020). 

2 85 FR 41716 (July 10, 2020). 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2020–0020] 

RIN 3170–AA98 

Qualified Mortgage Definition Under 

the Truth in Lending Act (Regulation 

Z): General QM Loan Definition 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretation. 

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. One 

category of QMs is the General QM 

category. For General QMs, the ratio of 

the consumer’s total monthly debt to 

total monthly income (DTI or DTI ratio) 

must not exceed 43 percent. This final 

rule amends the General QM loan 

definition in Regulation Z. Among other 

things, the final rule removes the 

General QM loan definition’s 43 percent 

DTI limit and replaces it with pricebased thresholds. Another category of 

QMs consists of loans that are eligible 

for purchase or guarantee by either the 

Federal National Mortgage Association 

(Fannie Mae) or the Federal Home Loan 

Mortgage Corporation (Freddie Mac) 

(government-sponsored enterprises or 

GSEs), while operating under the 

conservatorship or receivership of the 

Federal Housing Finance Agency 

(FHFA). The GSEs are currently under 

Federal conservatorship. In 2013, the 

Bureau established this category of QMs 

(Temporary GSE QMs) as a temporary 

measure that would expire no later than 

January 10, 2021 or when the GSEs 

cease to operate under conservatorship. 

In a final rule released on October 20, 

2020, the Bureau extended the 

Temporary GSE QM loan definition to 

expire on the mandatory compliance 

date of final amendments to the General 

QM loan definition in Regulation Z (or 

when the GSEs cease to operate under 

the conservatorship of the FHFA, if that 

happens earlier). In this final rule, the 

Bureau adopts the amendments to the 

General QM loan definition that are 

referenced in that separate final rule. 

DATES: This final rule is effective on 

March 1, 2021. However, the mandatory 

compliance date is July 1, 2021. For 

additional discussion of these dates, see 

part VII of the SUPPLEMENTARY

INFORMATION section below. 

FOR FURTHER INFORMATION CONTACT: 

Waeiz Syed, Counsel, or Ben Cady, 

Pedro De Oliveira, Sarita Frattaroli, 

David Friend, Mark Morelli, Marta 

Tanenhaus, Priscilla Walton-Fein, or 

Steve Wrone, Senior Counsels, Office of 

Regulations, at 202–435–7700. If you 

require this document in an alternative 

electronic format, please contact CFPB_

Accessibility@cfpb.gov. 

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 ATR/QM Rule defines 

several categories of QMs. 

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. For 

General QMs, the consumer’s DTI ratio 

must not exceed 43 percent. The ATR/ 

QM Rule requires that creditors must 

calculate, consider, and verify debt and 

income for purposes of determining the 

consumer’s DTI ratio using the 

standards contained in appendix Q of 

Regulation Z. 

A second, temporary category of QMs 

defined in the ATR/QM Rule consists of 

mortgages that (1) comply with the same 

loan-feature prohibitions and pointsand-fees limits as General QMs and (2) 

are eligible to be purchased or 

guaranteed by the GSEs while under the 

conservatorship of the FHFA. This final 

rule refers to these loans as Temporary 

GSE QMs, and the provision that 

created this loan category is commonly 

known as the GSE Patch. Unlike for 

General QMs, the ATR/QM Rule does 

not prescribe a DTI limit for Temporary 

GSE QMs. Thus, a loan can qualify as 

a Temporary GSE QM even if the 

consumer’s DTI ratio exceeds 43 

percent, as long as the loan is eligible to 

be purchased or guaranteed by either of 

the GSEs and satisfies the other 

Temporary GSE QM requirements. In 

addition, for Temporary GSE QMs, the 

ATR/QM Rule does not require creditors 

to use appendix Q to determine the 

consumer’s income, debt, or DTI ratio. 

In 2013, the Bureau provided in the 

ATR/QM Rule that the Temporary GSE 

QM loan definition would expire with 

respect to each GSE when that GSE 

ceases to operate under Federal 

conservatorship or on January 10, 2021, 

whichever comes first. The GSEs are 

currently under Federal 

conservatorship. Despite the Bureau’s 

expectations when the ATR/QM Rule 

was published in 2013, Temporary GSE 

QM originations continue to represent a 

large and persistent share of the 

residential mortgage loan market. 

Without changes to the General QM 

loan definition, a significant number of 

Temporary GSE QMs would not be 

made or would be made at higher prices 

when the Temporary GSE QM loan 

definition expires. The affected loans 

would include loans for which the 

consumer’s DTI ratio is above 43 

percent or the creditor’s method of 

documenting and verifying income or 

debt is incompatible with appendix Q. 

Based on 2018 data, the Bureau 

estimates that, as a result of the General 

QM loan definition’s 43 percent DTI 

limit, approximately 957,000 loans—16 

percent of all closed-end first-lien 

residential mortgage originations in 

2018—would be affected by the 

expiration of the Temporary GSE QM 

loan definition. These loans are 

currently originated as QMs due to the 

Temporary GSE QM loan definition but 

would not be originated under the 

current General QM loan definition, and 

might not be originated at all, if the 

Temporary GSE QM loan definition 

were to expire. 

On June 22, 2020, the Bureau released 

two proposed rules concerning the 

ATR/QM Rule; these proposed rules 

were published in the Federal Register 

on July 10, 2020. In one of the 

proposals—referred to in this final rule 

as the Extension Proposal—the Bureau 

proposed to extend the Temporary GSE 

QM loan definition until the effective 

date of a final rule issued by the Bureau 

amending the General QM loan 

definition.1 The other proposal 

concerned the issues addressed in this 

final rule. In that proposal—referred to 

in this final rule as the General QM 

Proposal or as the proposal—the Bureau 

proposed amendments to the General 

QM loan definition.2 In the General QM 

Proposal, the Bureau proposed, among 

other things, to remove the General QM 

loan definition’s DTI limit and replace 

it with a limit based on the loan’s 

pricing. The Bureau stated that it 

expected such amendments would 

allow most loans that currently could 

receive QM status under the Temporary 

GSE QM loan definition to receive QM 

status under the General QM loan 

definition if they are made after the 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86309 

3 85 FR 53568 (Aug. 28, 2020). 

4 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). 

5 15 U.S.C. 1601 et seq. 

6 Dodd-Frank Act sections 1411–12, 1414, 124 

Stat. 2142–48, 2149; 15 U.S.C. 1639c. 

7 15 U.S.C. 1639b(a)(2). 

8 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). 

9 15 U.S.C. 1639c(a)(3). 

10 15 U.S.C. 1639c(b)(1). 

Temporary GSE QM loan definition 

expires. Based on 2018 data, the Bureau 

estimated in the General QM Proposal 

that 943,000 conventional loans with 

DTI ratios above 43 percent would fall 

outside the QM definitions if there are 

no changes to the General QM loan 

definition before the expiration of the 

Temporary GSE QM loan definition but 

would fall within the General QM loan 

definition if it were amended as the 

Bureau proposed. The Bureau stated 

that, as a result, the General QM 

Proposal would help to facilitate a 

smooth and orderly transition away 

from the Temporary GSE QM loan 

definition. 

On August 18, 2020, the Bureau 

issued a third proposal concerning the 

ATR/QM Rule. In that proposal— 

referred to in this final rule as the 

Seasoned QM Proposal—the Bureau 

proposed to create a new category of 

QMs (Seasoned QMs) for first-lien, 

fixed-rate covered transactions that meet 

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.3

In a final rule released on October 20, 

2020 (the Extension Final Rule), the 

Bureau amended Regulation Z to 

replace the January 10, 2021 sunset date 

of the Temporary GSE QM loan 

definition with a provision stating that 

the Temporary GSE QM loan definition 

will be available only for covered 

transactions for which the creditor 

receives the consumer’s application 

before the mandatory compliance date 

of final amendments to the General QM 

loan definition in Regulation Z. The 

Extension Final Rule did not amend the 

provision stating that the Temporary 

GSE QM loan definition expires with 

respect to a GSE when that GSE ceases 

to operate under conservatorship (the 

conservatorship clause). The Extension 

Final Rule did not affect the QM 

definitions that apply to Federal 

Housing Administration (FHA), U.S. 

Department of Veterans Affairs (VA), 

U.S. Department of Agriculture (USDA), 

or Rural Housing Service (RHS) loans. 

In this final rule, the Bureau amends 

Regulation Z to replace the existing 

General QM loan definition with its 43 

percent DTI limit with a price-based 

General QM loan definition. Under the 

final rule, a loan meets the General QM 

loan definition in § 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 final 

rule provides higher thresholds for 

loans with smaller loan amounts, for 

certain manufactured housing loans, 

and for subordinate-lien transactions. 

The final rule retains the existing 

product-feature and underwriting 

requirements and limits on points and 

fees. Although the final rule removes 

the 43 percent DTI limit from the 

General QM loan definition, the final 

rule requires that the creditor consider 

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, debt obligations, 

alimony, child support, and DTI ratio or 

residual income 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 final rule removes 

appendix Q. To prevent uncertainty that 

may result from appendix Q’s removal, 

the final rule clarifies the consider and 

verify requirements. The 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). 

The effective date of this final rule is 

March 1, 2021, and the mandatory 

compliance date is July 1, 2021. 

Creditors will have the option of 

complying with the revised General QM 

loan definition for covered transactions 

for which creditors receive an 

application on or after March 1, 2021, 

and before July 1, 2021. The revised 

regulations apply to covered 

transactions for which creditors receive 

an application on or after July 1, 2021. 

II. Background 

A. Dodd-Frank Act Amendments to the 

Truth in Lending Act 

The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act) 4 amended the Truth in 

Lending Act (TILA) 5 to establish, 

among other things, ability-to-repay 

(ATR) requirements in connection with 

the origination of most residential 

mortgage loans.6 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.’’ 7 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.8

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 

repayment of the loan.9 A creditor, 

however, may not be certain whether its 

ATR determination is reasonable in a 

particular case. 

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: 

• 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 


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86310 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

11 15 U.S.C. 1639c(b)(2)(A). 

12 78 FR 6408 (Jan. 30, 2013). 

13See 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). 

15The 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 of 

Governors of the Federal Reserve System (Board), 

the Office of the Comptroller of the Currency (OCC), 

the Federal Deposit Insurance Corporation (FDIC), 

the Securities and Exchange Commission, the 

FHFA, and the U.S. Department of Housing and 

Urban Development (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). That 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. That 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. 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. 

16 12 CFR 1026.43(e)(2)(i) through (iii). 

17 12 CFR 1026.43(e)(2)(iv). 

18 12 CFR 1026.43(e)(2)(v). 

19 12 CFR 1026.43(e)(2)(vi). 

20 78 FR 6408, 6527–28 (Jan. 30, 2013) (noting 

that appendix Q incorporates, with certain 

modifications, the definitions and standards in 

HUD Handbook 4155.1, Mortgage Credit Analysis 

for Mortgage Insurance on One-to-Four-Unit 

Mortgage Loans). 

21 12 CFR 1026, appendix Q. 

22 12 CFR 1026.43(e)(2)(i) through (iii). 

23 12 CFR 1026.43(e)(4). 

24 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 HUD (FHA loans), the U.S. Department of 

Veterans Affairs (VA loans), the U.S. Department of 

Agriculture (USDA loans), and the Rural Housing 

Service (RHS loans). 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 (HUD rule). 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 Apr. 1, 2016). 

25 78 FR 6408, 6527 (Jan. 30, 2013). 

26 Id. at 6527–28. 

27 Id. at 6533–34. 

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

B. 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 or the Rule. The 

ATR/QM Rule implements the statutory 

ATR provisions discussed above and 

defines several categories of QMs.14

1. General QMs 

One category of QMs defined by the 

ATR/QM Rule consists of General 

QMs.15 A loan is a General QM if: 

• The loan does not have negativeamortization, interest-only, or balloonpayment features, a term that exceeds 30 

years, or points and fees that exceed 

specified limits; 16

• The creditor underwrites the loan 

based on a fully amortizing schedule 

using the maximum rate permitted 

during the first five years; 17

• The creditor considers and verifies 

the consumer’s income and debt 

obligations in accordance with 

appendix Q; 18 and 

• The consumer’s DTI ratio is no 

more than 43 percent, determined in 

accordance with appendix Q.19

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. The 

standards in appendix Q were adapted 

from guidelines maintained by FHA 

when the January 2013 Final Rule was 

issued.20 Appendix Q addresses how to 

determine a consumer’s employmentrelated 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.21

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 22 and (2) are eligible to 

be purchased or guaranteed by either 

GSE while under the conservatorship of 

the FHFA.23 Unlike for General QMs, 

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.24

In the January 2013 Final Rule, the 

Bureau explained why it created the 

Temporary GSE QM loan definition. 

The Bureau observed that it did not 

believe that a 43 percent DTI ratio 

‘‘represents the outer boundary of 

responsible lending’’ and acknowledged 

that historically, and even after the 

financial crisis, over 20 percent of 

mortgages exceeded that threshold.25

However, the Bureau stated that, as DTI 

ratios increase, the general ATR 

procedures, rather than the QM 

framework, are ‘‘better suited for 

consideration of all relevant factors that 

go to a consumer’s ability to repay a 

mortgage loan’’ and that ‘‘[o]ver the long 

term . . . there will be a robust and 

sizable market for prudent loans beyond 

the 43 percent threshold even without 

the benefit of the presumption of 

compliance that applies to qualified 

mortgages.’’ 26

At the same time, the Bureau noted 

that the mortgage market was especially 

fragile following the financial crisis, and 

GSE-eligible loans and federally insured 

or guaranteed loans made up a 

significant majority of the market.27 The 

Bureau believed that it was appropriate 

to consider for a period of time, and 

while the GSEs were under Federal 

conservatorship, that GSE-eligible loans 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86311 

28 Id. at 6534. 

29 Id. at 6533. 

30 Id. at 6534. 

31 Id. at 6536. 

32 Id. at 6534. 

33 Id. 

34 Id. 

35 Id. at 6511. 36 Id. at 6507. 37 Id. at 6511. 38 Id. at 6514. 39 12 CFR 1026.43(b)(4). 40 12 CFR 1026.43(e)(1)(i). 41 12 CFR 1026.43(e)(1)(ii). 42 78 FR 6408 at 6506, 6510–14 (Jan. 30, 2013). 43 Id. at 6408. 

44 Id. at 6511. 

45 Id. 

46 Id. 

47 Id. 

48 Id. 

49 Id. 

50 Id. at 6511–12. 

51 Id. at 6413–14, 6510–11. 

52Riegle Community Development and 

Regulatory Improvement Act of 1994, Public Law 

103–325, 108 Stat. 2160 (1994). 

53As originally enacted, HOEPA defined a class 

of ‘‘high-cost mortgages,’’ which were generally 

closed-end home-equity loans (excluding homepurchase loans) with APRs or total points and fees 

exceeding prescribed thresholds. Mortgages covered 

by HOEPA have been referred to as ‘‘HOEPA 

loans,’’ ‘‘Section 32 loans,’’ or ‘‘high-cost 

mortgages.’’ 

were originated with an appropriate 

assessment of the consumer’s ability to 

repay and therefore warranted being 

treated as QMs.28 The Bureau believed 

in 2013 that this temporary category of 

QMs would, in the near term, help to 

ensure access to responsible, affordable 

credit for consumers with DTI ratios 

above 43 percent, as well as facilitate 

compliance by creditors by promoting 

the use of widely recognized, federally 

related underwriting standards.29

In making the Temporary GSE QM 

loan definition temporary, the Bureau 

sought to ‘‘provide an adequate period 

for economic, market, and regulatory 

conditions to stabilize’’ and ‘‘a 

reasonable transition period to the 

general qualified mortgage 

definition.’’ 30 The Bureau believed that 

the Temporary GSE QM loan definition 

would benefit consumers by preserving 

access to credit while the mortgage 

industry adjusted to the ATR/QM 

Rule.31 The Bureau also explained that 

it structured the Temporary GSE QM 

loan definition to cover loans eligible to 

be purchased or guaranteed by either of 

the GSEs—regardless of whether the 

loans are actually purchased or 

guaranteed—to leave room for non-GSE 

private investors to return to the market 

and secure the same legal protections as 

the GSEs.32 The Bureau believed that, as 

the market recovered, the GSEs and the 

Federal agencies would be able to 

reduce their market presence, the 

percentage of Temporary GSE QMs 

would decrease, and the market would 

shift toward General QMs and non-QM 

loans above a 43 percent DTI ratio.33

The Bureau’s view was that a shift 

towards non-QM loans could be 

supported by the non-GSE private 

market—i.e., by institutions holding 

such loans in portfolio, selling them in 

whole, or securitizing them in a 

rejuvenated private-label securities 

(PLS) market. The Bureau noted that, 

pursuant to its statutory obligations 

under the Dodd-Frank Act, it would 

assess the impact of the ATR/QM Rule 

five years after the ATR/QM Rule’s 

effective date, and the assessment 

would provide an opportunity to 

analyze the Temporary GSE QM loan 

definition.34

3. Presumption of Compliance for QMs 

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. The Bureau concluded 

that the statute is ambiguous as to 

whether a creditor originating a QM 

receives a safe harbor or a rebuttable 

presumption that it has complied with 

the ATR requirements.35 The Bureau 

noted that its analysis of the statutory 

construction and policy implications 

demonstrated that there are sound 

reasons for adopting either 

interpretation.36 The Bureau concluded 

that the statutory language does not 

mandate either interpretation and that 

the presumptions should be tailored to 

promote the policy goals of the statute.37

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.’’ 38

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.39 A creditor 

that makes a QM that is not ‘‘higherpriced’’ 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.40 A 

creditor that makes a loan that meets the 

standards for a QM but is ‘‘higherpriced’’ is entitled to a rebuttable 

presumption that it has complied with 

the ATR/QM Rule.41

The Bureau explained in the January 

2013 Final Rule why it was adopting 

different presumptions of compliance 

based on the pricing of QMs.42 The 

Bureau noted that the line it was 

drawing is one that has long been 

recognized as a rule of thumb to 

separate prime loans from subprime 

loans.43 The Bureau noted that loan 

pricing is calibrated to the risk of the 

loan and that the historical performance 

of prime and subprime loans indicates 

greater risk for subprime loans.44 The 

Bureau also noted that consumers taking 

out subprime loans tend to be less 

sophisticated and have fewer options 

and that the most abuses prior to the 

financial crisis occurred in the subprime 

market.45 The Bureau concluded that 

these factors warrant imposing 

heightened standards for higher-priced 

loans.46 For prime loans, however, the 

Bureau found that lower rates are 

indicative of ability to repay and noted 

that prime loans have performed 

significantly better than subprime 

loans.47 The Bureau concluded that if a 

loan met the product and underwriting 

requirements for QMs and was not a 

higher-priced loan, there are sufficient 

grounds for concluding that the creditor 

satisfied the ATR requirements.48 The 

Bureau noted that the conclusive 

presumption may reduce uncertainty 

and litigation risk and may promote 

enhanced competition in the prime 

market.49 The Bureau also noted that the 

litigation risk for rebuttable 

presumption QMs likely would be quite 

modest and would have a limited 

impact on access to credit.50

The Bureau also noted in the January 

2013 Final Rule that policymakers have 

long relied on pricing to determine 

which loans should be subject to 

additional regulatory requirements.51

That history of reliance on pricing 

continues to provide support for a pricebased approach to the General QM loan 

definition. For example, in 1994 

Congress amended TILA by enacting the 

Home Ownership and Equity Protection 

Act (HOEPA) as part of the Riegle 

Community Development and 

Regulatory Improvement Act of 1994.52

HOEPA was enacted as an amendment 

to TILA to address abusive practices in 

refinancing and home-equity mortgage 

loans with high interest rates or high 

fees.53 The statute applied generally to 

closed-end mortgage credit but excluded 


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54The Dodd-Frank Act adjusted the baseline for 

the APR comparison, lowered the points-and-fees 

threshold, and added a prepayment trigger. 55TILA section 129(h); 15 U.S.C. 1639(h). In 

addition to the disclosures and limitations specified 

in the statute, HOEPA expanded the Board’s 

rulemaking authority, among other things, to 

prohibit acts or practices the Board found to be 

unfair and deceptive in connection with mortgage 

loans. 56Subsequently renumbered as sections 1026.31, 

1026.32, and 1026.33 of Regulation Z. 57See 60 FR 15463 (Mar. 24, 1995). 58Under the Board’s 2008 HOEPA Final Rule, an 

HPML is a consumer credit transaction secured by 

the consumer’s principal dwelling with an APR that 

exceeds APOR for a comparable transaction, as of 

the date the interest rate is set, by 1.5 or more 

percentage points for loans secured by a first lien 

on the dwelling, or by 3.5 or more percentage points 

for loans secured by a subordinate lien on the 

dwelling. 73 FR 44522 (July 30, 2008) (2008 HOEPA 

Final Rule). The definition of an HPML includes 

practically all ‘‘high-cost mortgages’’ because the 

latter transactions are determined by higher loan 

pricing threshold tests. See 12 CFR 226.35(a)(1). 

59 73 FR 44522 (July 30, 2008). 

60See 12 CFR 1026.34(a)(4)(iii), (iv). 

61 12 U.S.C. 5512(d). 

62 82 FR 25246 (June 1, 2017). 

63See generally 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_assessmentreport.pdf (Assessment Report). 

64See, e.g., id. at 83–84, 100–05. 65See, e.g., id. at 10, 194–96. 66See, e.g., id. at 10–11, 117, 131–47. 67 Id. at 188. Because the Temporary GSE QM 

loan definition generally affects only loans that 

conform to the GSEs’ guidelines, the Assessment 

Report’s discussion of the Temporary GSE QM loan 

definition focused on the conforming segment of 

the market, not on non-conforming (e.g., jumbo) 

loans. 

68 Id. at 191. 

69 Id. at 192. 

70 Id. at 13, 190, 238. 

purchase money mortgage loans and 

reverse mortgages. Coverage was 

triggered if a loan’s APR exceeded 

comparable Treasury securities by 

specified thresholds for particular loan 

types, or if points and fees exceeded 8 

percent of the total loan amount or a 

dollar threshold.54 For high-cost loans 

meeting either of those thresholds, 

HOEPA required creditors to provide 

special pre-closing disclosures, 

restricted prepayment penalties and 

certain other loan terms, and regulated 

various creditor practices, such as 

extending credit without regard to a 

consumer’s ability to repay the loan. 

HOEPA also created special substantive 

protections for high-cost mortgages, 

such as prohibiting a creditor from 

engaging in a pattern or practice of 

extending a high-cost mortgage to a 

consumer based on the consumer’s 

collateral without regard to the 

consumer’s repayment ability, including 

the consumer’s current and expected 

income, current obligations, and 

employment.55 The Board implemented 

the HOEPA amendments at §§ 226.31, 

226.32, and 226.33 56 of Regulation Z 

(12 CFR part 226).57

In 2001, the Board issued rules 

expanding HOEPA’s protections to more 

loans by revising the APR threshold for 

first-lien mortgage loans and revising 

the ATR provisions to provide for a 

presumption of a violation of the rule if 

the creditor engages in a pattern or 

practice of making high-cost mortgages 

without verifying and documenting the 

consumer’s repayment ability. 

In 2008, the Board exercised its 

authority under HOEPA to extend 

certain protections concerning a 

consumer’s ability to repay and 

prepayment penalties to a new category 

of ‘‘higher-priced mortgage loans’’ 

(HPMLs) 58 with APRs that are lower 

than those prescribed for high-cost loans 

but that nevertheless exceed the APOR 

by prescribed amounts. This new 

category of loans was designed to 

include subprime credit, including 

subprime purchase money mortgage 

loans. Specifically, the Board exercised 

its authority to revise HOEPA’s 

restrictions on high-cost loans based on 

its conclusion that the revisions were 

necessary to prevent unfair and 

deceptive acts or practices in 

connection with mortgage loans.59 The 

Board concluded that a prohibition on 

making individual loans without regard 

to repayment ability was necessary to 

ensure a remedy for consumers who are 

given unaffordable loans and to deter 

irresponsible lending. The 2008 HOEPA 

Final Rule provided a presumption of 

compliance with the higher-priced 

mortgage ability-to-repay requirements 

if the creditor follows certain 

procedures regarding underwriting the 

loan payment, assessing the DTI ratio or 

residual income, and limiting the 

features of the loan, in addition to 

following certain procedures mandated 

for all creditors.60 However, the 2008 

HOEPA Final Rule made clear that even 

if the creditor follows the required and 

optional criteria, the creditor obtained a 

presumption (not a safe harbor) of 

compliance with the repayment ability 

requirement. The consumer therefore 

could still rebut or overcome that 

presumption by showing that, despite 

following the required and optional 

procedures, the creditor nonetheless 

disregarded the consumer’s ability to 

repay the loan. 

C. 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.61 In June 2017, the 

Bureau published a request for 

information in connection with its 

assessment of the ATR/QM Rule 

(Assessment RFI).62 These comments 

are summarized in general terms in part 

III below. 

In January 2019, the Bureau published 

its ATR/QM Rule Assessment Report.63

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. 

The Assessment Report found that 

loans with higher DTI ratios have been 

associated with higher levels of ‘‘early 

delinquency’’ (i.e., delinquency within 

two years of origination), which the 

Bureau used as a proxy for measuring 

consumer repayment ability at 

consummation across a wide pool of 

loans.64 The Assessment Report also 

found that the ATR/QM Rule did not 

eliminate access to credit for consumers 

with DTI ratios above 43 percent who 

qualify for Temporary GSE QMs.65 On 

the other hand, based on applicationlevel data obtained from nine large 

lenders, 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.66

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.67 As 

discussed, the GSEs’ share of the 

conventional, conforming purchasemortgage market was large before the 

ATR/QM Rule, and the Assessment 

found a small increase in that share 

since the ATR/QM Rule’s effective date, 

reaching 71 percent in 2017.68 The 

Assessment Report noted that, at least 

for loans intended for sale in the 

secondary market, creditors generally 

offer a Temporary GSE QM even if a 

General QM could be originated.69

The continued prevalence of 

Temporary GSE QM originations is 

contrary to the Bureau’s expectation at 

the time it issued the ATR/QM Rule in 

2013.70 The Assessment Report 

discussed several possible reasons for 

the continued prevalence of Temporary 

GSE QM originations. The Assessment 

Report first highlighted commenters’ 

concerns with the perceived lack of 

clarity in appendix Q and found that 

such concerns ‘‘may have contributed to 

investors’—and at least derivatively, 

creditors’—preference’’ for Temporary 

GSE QMs instead of originating loans 


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71 Id. at 193. 

72 Id. at 193–94. 

73 Id. at 194. 

74 Id. 

75 Id. at 194–95. 

76 Id. at 119–20. 

77 Id. at 153. 

78 Id. at 196. 

79 Id. 

80 Id. 

81 Id. 

82 Id. at 197. 

83 Id. at 196. 84 Id. at 205. 85 Id. 86The Quarterly CARES Act Report to Congress: 

Hearing Before the S. Comm. on Banking, Housing, 

and Urban Affairs, 116th Cong. 2–3 (2020) 

(statement of Jerome H. Powell, Chairman, Board of 

Governors of the Federal Reserve System). 87Agency MBS are backed by loans guaranteed by 

Fannie Mae, Freddie Mac, and the Government 

National Mortgage Association (Ginnie Mae). 

88Laurie Goodman et al., Urban Inst., Housing 

Finance at a Glance, Monthly Chartbook (Mar. 26, 

2020), https://www.urban.org/sites/default/files/ 

publication/101926/housing-finance-at-a-glance-amonthly-chartbook-march-2020.pdf. 

89Press Release, Bd. of Governors of the Fed. 

Reserve Sys., Federal Reserve announces extensive 

new measures to support the economy (Mar. 23, 

2020), https://www.federalreserve.gov/newsevents/ 

pressreleases/monetary20200323b.htm. 

90The Quarterly CARES Act Report to Congress: 

Hearing Before the S. Comm. on Banking, Housing, 

and Urban Affairs, 116th Cong. 3 (2020) (statement 

of Jerome H. Powell, Chairman, Board of Governors 

of the Federal Reserve System). 

91Non-agency MBS are not backed by loans 

guaranteed by Fannie Mae, Freddie Mac or Ginnie 

Mae. This includes securities collateralized by nonQM loans. 

92Brandon Ivey, Non-Agency MBS Issuance 

Slowed in First Quarter, Inside Mortg. Fin. (Apr. 3, 

2020), https://www.insidemortgagefinance.com/ 

articles/217623-non-agency-mbs-issuance-slowedin-first-quarter. 

under the General QM loan definition.71

In addition, the Bureau has not revised 

appendix Q since 2013, while other 

standards for calculating and verifying 

debt and income have been updated 

more frequently.72

The Assessment Report noted that a 

second possible reason for the 

continued prevalence of Temporary GSE 

QMs is that the GSEs were able to 

accommodate the demand for mortgages 

above the General QM loan definition’s 

DTI limit of 43 percent as the DTI ratio 

distribution in the market shifted 

upward.73 According to the Assessment 

Report, in the years since the ATR/QM 

Rule took effect, house prices have 

increased and consumers hold more 

mortgage and other debt (including 

student loan debt), all of which have 

caused the DTI ratio distribution to shift 

upward.74 The Assessment Report noted 

that the share of GSE home purchase 

loans with DTI ratios above 43 percent 

has increased since the ATR/QM Rule 

took effect in 2014.75 The available data 

suggest that the share of loans with DTI 

ratios above 43 percent has declined in 

the non-GSE market relative to the GSE 

market.76 The non-GSE market has 

constricted even with respect to highly 

qualified consumers; those with higher 

incomes and higher credit scores 

represent a greater share of denials.77

The Assessment Report found that a 

third possible reason for the persistence 

of Temporary GSE QMs is the structure 

of the secondary market.78 If creditors 

adhere to the GSEs’ guidelines, they 

gain access to a robust, highly liquid 

secondary market.79 In contrast, the 

Assessment Report noted that while 

private market securitizations had 

grown somewhat in recent years, their 

volume was still a fraction of their precrisis levels.80 There were less than $20 

billion in new origination PLS issuances 

in 2017, compared with $1 trillion in 

2005,81 and only 21 percent of new 

origination PLS issuances in 2017 were 

non-QM issuances.82 To the extent that 

private 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 nonQM loans.83 The Assessment Report 

noted that the Temporary GSE QM loan 

definition may itself be inhibiting the 

growth of the non-QM market.84

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 

loan (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.85

D. 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 mortgageorigination 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 mortgagecredit availability for many 

consumers—including those who would 

be dependent on the non-QM market for 

financing—remains tight. The 

pandemic’s impact on both the 

secondary market for new originations 

and on the servicing of existing 

mortgages is described below. 

1. Secondary Market Impacts and 

Implications for Mortgage Origination 

Markets 

The early economic disruptions 

associated with the COVID–19 

pandemic restricted the flow of credit in 

the U.S. economy, particularly as 

uncertainty rose in mid-March 2020, 

and investors moved rapidly towards 

cash and government securities.86 The 

lack of investor demand to purchase 

mortgages, combined with a large 

supply of agency mortgage-backed 

securities (MBS) entering the market,87

resulted in widening spreads between 

the rates on a 10-year Treasury note and 

mortgage interest rates.88 This dynamic 

made it difficult for creditors to 

originate loans, as many creditors rely 

on the ability to profitably sell loans in 

the secondary market to generate the 

liquidity to originate new loans. This 

resulted in mortgages becoming more 

expensive for both homebuyers and 

homeowners looking to refinance. After 

the actions taken by the Board in March 

2020 to purchase agency MBS ‘‘in the 

amounts needed to support smooth 

market functioning and effective 

transmission of monetary policy to 

broader financial conditions and the 

economy,’’ 89 market conditions have 

improved substantially.90 This has 

helped to tighten interest rate spreads, 

which stabilizes mortgage rates, 

resulting in a decline in mortgage rates 

since the Board’s intervention and in a 

significant increase in refinance activity. 

However, non-agency MBS 91 are 

generally perceived by investors as 

riskier than agency MBS. As a result, 

private capital has remained tight and 

non-agency mortgage credit, including 

non-QM lending, has declined. Issuance 

of non-agency MBS declined by 8.2 

percent in the first quarter of 2020, with 

nearly all the transactions completed in 

January and February before the 

COVID–19 pandemic began to affect the 

economy significantly.92 Nearly all 

major non-QM creditors ceased making 

loans in March and April 2020. 

Beginning in May 2020, issuers of nonagency MBS began to test the market 

with deals collateralized by non-QM 

loans largely originated prior to the 

pandemic, and investor demand for 

these securitizations has begun to 

recover. However, no securitization has 

been completed that is predominantly 

collateralized by non-QM loans 


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93Brandon Ivey, Non-Agency MBS Issuance Slow 

in Mid-August, Inside Mortg. Fin. (Aug. 21, 2020), 

https://www.insidemortgagefinance.com/articles/ 

218973-non-agency-mbs-issuance-slow-in-midaugust. 

94Brandon 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-upin-3q-amid-slow-recovery. 

95Brandon Ivey, Jumbo Originations Drop Nearly 

22% in First Quarter, Inside Mortg. Fin. (May 15, 

2020) https://www.insidemortgagefinance.com/ 

articles/218028-jumbo-originations-drop-nearly-22- 

in-first-quarter. 

96Brandon Ivey, Jumbo Lending Flat in 3Q, Wide 

Variation Among Lenders, Inside Mortg. Fin. (Nov. 

13, 2020) https://www.insidemortgagefinance.com/ 

articles/219738-jumbo-lending-level-in-3q-widevariation-among-lenders. 

97Laurie Goodman et al., Urban Inst., Housing 

Finance at a Glance, Monthly Chartbook, Inside 

Mortg. Fin. (Nov. 24, 2020), https://www.urban.org/ 

sites/default/files/publication/103273/housingfinance-at-a-glance-a-monthly-chartbooknovember-2020_0.pdf. 

98Public Law 116–136, 134 Stat. 281 (2020) 

(includes loans backed by HUD, USDA, VA, Fannie 

Mae, and Freddie Mac). 

99See, 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-Foreclosureand-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. 

100The GSEs typically repurchase loans out of the 

trust after they fall 120 days delinquent, after which 

the servicer is no longer required to advance 

principal and interest, but Ginnie Mae requires 

servicers to advance principal and interest until the 

default is resolved. On April 21, 2020, the FHFA 

confirmed that servicers of GSE loans will only be 

required to advance four months of mortgage 

payments, regardless of whether the GSEs 

repurchase the loans from the trust after 120 days 

of delinquency. Fed. Hous. Fin. Agency, FHFA 

Addresses Servicer Liquidity Concerns, Announces 

Four Month Advance Obligation Limit for Loans in 

Forbearance (Apr. 21, 2020), https://www.fhfa.gov/ 

Media/PublicAffairs/Pages/FHFA-AddressesServicer-Liquidity-Concerns-Announces-FourMonth-Advance-Obligation-Limit-for-Loans-inForbearance.aspx. 

101Press Release, Mortg. Bankers Ass’n, Share of 

Mortgage Loans in Forbearance Increases to 5.54% 

(Dec. 1, 2020), https://www.mba.org/2020-pressreleases/december/share-of-mortgage-loans-inforbearance-increases-to-554-percent. 

102Warehouse providers are creditors that 

provide financing to mortgage originators and 

servicers to fund and service loans. 

103Maria Volkova, FHA/VA Lenders Raise Credit 

Score Requirements, Inside Mortg. Fin. (Apr. 3, 

2020), https://www.insidemortgagefinance.com/ 

articles/217636-fhava-lenders-raise-fico-creditscore-requirements. 

104Press Release, Fed. Hous. Fin. Agency, 

Adverse Market Refinance Fee Implementation now 

December 1 (Aug. 25, 2020), https://www.fhfa.gov/ 

Media/PublicAffairs/Pages/Adverse-MarketRefinance-Fee-Implementation-Now-December1.aspx. 

105On April 10, 2020, Ginnie Mae released 

guidance on a Pass-Through Assistance Program 

whereby Ginnie Mae will provide financial 

assistance at a fixed interest rate to servicers facing 

a principal and interest shortfall as a last resort. 

Ginnie Mae, All Participant Memorandum (APM) 

20–03: Availability of Pass-Through Assistance 

Program for Participants in Ginnie Mae’s SingleFamily MBS Program (Apr. 10, 2020), https://

www.ginniemae.gov/issuers/program_guidelines/ 

Pages/mbsguideapms

libdisppage.aspx?ParamID=105. On April 7, 2020, 

Ginnie Mae also announced approval of a servicing 

advance financing facility, whereby mortgage 

servicing rights are securitized and sold to private 

investors. Press Release, Ginnie Mae, Ginnie Mae 

approves private market servicer liquidity facility 

(Apr. 7, 2020), https://www.ginniemae.gov/ 

newsroom/Pages/PressReleaseDispPage.aspx?

ParamID=194. 

originated since the pandemic began.93

Many non-QM creditors—which largely 

depend on the ability to sell loans in the 

secondary market in order to fund new 

loans—have begun to resume 

originations, albeit with tighter 

underwriting requirements.94 Prime 

jumbo financing also dropped nearly 22 

percent in the first quarter of 2020.95

Banks increased interest rates and 

narrowed the product offerings such 

that only consumers with pristine credit 

profiles were eligible, as these loans 

must be held in portfolio when the 

secondary market for non-agency MBS 

contracts, and volume remains flat.96

Despite the recent gains in both the 

agency and the non-agency mortgage 

sectors, the GSEs continue to play a 

dominant role in the market recovery, 

with the GSE share of first-lien mortgage 

originations at 61.9 percent in the third 

quarter of 2020, up from 45.3 percent in 

the third quarter of 2019. The FHA and 

VA share declined slightly to 17.4 

percent from 19.5 percent a year prior, 

according to an analysis by the Urban 

Institute. Portfolio lending declined to 

19.6 percent in the third quarter of 2020, 

down from 33.3 percent in the third 

quarter of 2019, and private label 

securitizations declined to 1 percent 

from 1.8 percent a year prior.97

2. Servicing Market Impacts and 

Implications for Origination Markets 

In addition to the direct impact on 

origination volume and composition, 

the pandemic’s impact on the mortgage 

servicing market has downstream effects 

on mortgage originations as many of the 

same entities both originate and service 

mortgages. Anticipating that a number 

of homeowners would struggle to pay 

their mortgages due to the pandemic 

and related economic impacts, Congress 

passed and the President signed into 

law the Coronavirus Aid, Relief, and 

Economic Security Act (CARES Act) 98

in March 2020. 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 FHA, VA or 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.99 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. 

Following the passage of the CARES 

Act, some mortgage servicers remain 

obligated to make some principal and 

interest payments to investors in GSE 

and Ginnie Mae securities, even if 

consumers are not making payments.100

Servicers also remain obligated to make 

escrowed real estate tax and insurance 

payments to local taxing authorities and 

insurance companies. While servicers 

are required to hold liquid reserves to 

cover anticipated advances, early in the 

pandemic there were significant 

concerns that higher-than-expected 

forbearance rates over an extended 

period of time could lead to liquidity 

shortages, particularly among many 

non-bank servicers. However, 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, 2020.101

Because many mortgage servicers also 

originate the loans they service, many 

creditors, as well as several warehouse 

providers,102 initially responded to the 

risk of elevated forbearances and higherthan-expected monthly advances by 

imposing credit overlays—i.e., 

additional underwriting standards—for 

new originations. These new 

underwriting standards include more 

stringent requirements for non-QM, 

jumbo, and government loans.103 An 

‘‘adverse market fee’’ of 50 basis points 

on most refinances became effective for 

new originations delivered to the GSEs 

on or after December 1, 2020, to cover 

projected losses due to forbearances, the 

foreclosure moratoriums, and other 

default servicing expenses.104 However, 

due to refinance origination profits 

resulting from historically low interest 

rates, the leveling off in forbearance 

rates, and actions taken at the Federal 

level to alleviate servicer liquidity 

pressure,105 concerns over non-bank 

liquidity and related credit overlays 

have begun to ease, though Federal 


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106Brandon Ivey, Non-QM Lenders Regaining 

Footing, Inside Mortg. Fin. (July 24, 2020), https:// 

www.insidemortgagefinance.com/articles/218696- 

non-qm-lenders-regaining-footing-with-a-positiveoutlook (on file). 

107The Bureau has consulted with agencies 

including the FHFA, the Board, FHA, the FDIC, the 

OCC, the Federal Trade Commission, the National 

Credit Union Administration, HUD, and the 

Department of the Treasury. 

108 82 FR 25246 (June 1, 2017). 

109See Assessment Report, supra note 63, 

appendix B (summarizing comments received in 

response to the Assessment RFI). 

110See Bureau of Consumer Fin. Prot., Call for 

Evidence, https://www.consumerfinance.gov/policycompliance/notice-opportunities-comment/archiveclosed/call-for-evidence (last updated Apr. 17, 

2018). 

111 83 FR 10437 (Mar. 9, 2018). 

112 83 FR 12286 (Mar. 21, 2018). 

113 83 FR 12881 (Mar. 26, 2018). 

114 84 FR 37155, 37160–62 (July 31, 2019). 

115The Bureau stated that if the amount of time 

industry would need to change its practices in 

response to the rule depends on how the Bureau 

revises the General QM loan definition, the Bureau 

requested time estimates based on alternative 

possible definitions. 

regulators continue to monitor the 

situation.106 While the non-QM market 

has begun to recover, it is unclear how 

quickly non-banks that originate nonQM loans will fully return to their prepandemic level of operations and loan 

production. 

III. Summary of the Rulemaking 

Process 

The Bureau has solicited and received 

substantial public and stakeholder input 

on issues related to this final rule. In 

addition to the Bureau’s discussions 

with and communications from industry 

stakeholders, consumer advocates, other 

Federal agencies,107 and members of 

Congress, the Bureau issued requests for 

information (RFIs) in 2017 and 2018 and 

in July 2019 issued an advance notice of 

proposed rulemaking regarding the 

ATR/QM Rule (ANPR). The Bureau 

released the Extension Proposal and the 

General QM Proposal on June 22, 2020, 

and the Seasoned QM Proposal on 

August 18, 2020. The Bureau issued the 

Extension Final Rule on October 20, 

2020. 

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.108 In response to the 

Assessment RFI, the Bureau received 

approximately 480 comments from 

creditors, industry groups, consumer 

advocates, and individuals.109 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. 

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.110 As part of the 

call for evidence, the Bureau published 

requests for information relating to, 

among other things, the Bureau’s 

rulemaking process,111 the Bureau’s 

adopted regulations and new 

rulemaking authorities,112 and the 

Bureau’s inherited regulations and 

inherited rulemaking authorities.113 In 

response to the call for evidence, the 

Bureau received comments on the ATR/ 

QM Rule from stakeholders, including 

consumer advocates 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, discussed above. 

B. The ANPR 

On July 25, 2019, the Bureau issued 

the ANPR. 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.114 The Bureau 

requested comment on how much time 

industry would need to change its 

practices in response to any changes the 

Bureau might make to the General QM 

loan definition.115 The Bureau received 

approximately 85 comments on the 

ANPR from businesses in the mortgage 

industry (including creditors), consumer 

advocates, elected officials, individuals, 

and research centers. The General QM 

Proposal provided a summary of these 

comments, and the Bureau considered 

these comments in developing the 

proposal. 

C. The Extension Proposal, General QM 

Proposal, and Seasoned QM Proposal 

The Bureau issued the Extension 

Proposal and the General QM Proposal 

on June 22, 2020, and those proposals 

were published in the Federal Register 

on July 10, 2020. In the Extension 

Proposal, the Bureau proposed to 

replace the January 10, 2021 sunset date 

of the Temporary GSE QM loan 

definition with a provision that extends 

the Temporary GSE QM loan definition 

until the effective date of final 

amendments to the General QM loan 

definition in Regulation Z (i.e., a final 

rule relating to the General QM 

Proposal). The Bureau did not propose 

to amend the conservatorship clause. 

The comment period for the Extension 

Proposal ended on August 10, 2020. 

In the General QM Proposal, the 

Bureau proposed, among other things, to 

remove the General QM loan 

definition’s DTI limit and replace it 

with a limit based on the loan’s pricing. 

Under the proposal, a loan would have 

met the General QM loan definition in 

§ 1026.43(e)(2) only if the APR exceeds 

APOR for a comparable transaction by 

less than 2 percentage points as of the 

date the interest rate is set. The Bureau 

proposed higher thresholds for loans 

with smaller loan amounts and 

subordinate-lien transactions. The 

Bureau also proposed to retain the 

existing product-feature and 

underwriting requirements and limits 

on points and fees. Although the Bureau 

proposed to remove the 43 percent DTI 

limit from the General QM loan 

definition, the General QM Proposal 

would have required that the creditor 

consider the consumer’s DTI ratio or 


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116Based on 2018 data, the Bureau estimated in 

the General QM Proposal that 943,000 High-DTI 

conventional loans would fall outside the QM 

definitions if there are no changes to the General 

QM loan definition prior to the expiration of the 

Temporary GSE QM loan definition but would fall 

within the General QM loan definition if amended 

as the Bureau proposed. 

117 85 FR 53568 (Aug. 28, 2020). 

118 85 FR 60096 (Sept. 24, 2020). 

119The Extension Final Rule also did not affect 

the QM definitions that apply to FHA, VA, USDA, 

or RHS loans. 

120 12 U.S.C. 5581(a)(1)(A). 

121 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). 

122 15 U.S.C. 1604(a). 

123 15 U.S.C. 1601(a). 

124 15 U.S.C. 1639b(a)(2). 

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. The 

Bureau proposed to remove appendix Q. 

To mitigate the uncertainty that may 

result from appendix Q’s removal, the 

General QM Proposal would have 

clarified the consider and verify 

requirements. The Bureau proposed to 

preserve 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). 

Although the Bureau proposed to 

remove the 43 percent DTI limit and 

adopt a price-based approach for the 

General QM loan definition, the Bureau 

also requested comment on two 

alternative approaches: (1) Retaining the 

DTI limit and increasing it to a Specific 

threshold between 45 percent and 48 

percent or (2) using a hybrid approach 

involving both pricing and a DTI limit, 

such as applying a DTI limit to loans 

that are above specified rate spreads. 

Under these alternative approaches, 

creditors would not have been required 

to verify debt and income using 

appendix Q. 

The Bureau stated in the General QM 

Proposal that the proposed amendments 

would allow most loans that currently 

could receive QM status under the 

Temporary GSE QM loan definition to 

receive QM status under the General 

QM loan definition.116 The Bureau 

stated that, as a result, the General QM 

Proposal would help to facilitate a 

smooth and orderly transition away 

from the Temporary GSE QM loan 

definition. The Bureau proposed that 

the effective date of a final rule relating 

to the General QM Proposal would be 

six months after publication of the final 

rule in the Federal Register. The revised 

regulations would have applied to 

covered transactions for which creditors 

receive an application on or after this 

effective date. The comment period for 

the General QM Proposal ended on 

September 8, 2020. The Bureau received 

approximately 75 comments in response 

to the General QM Proposal from 

industry, consumer advocates, and 

others. The Bureau summarizes and 

responds to these comments in parts V 

through VIII below. 

On August 18, 2020, the Bureau 

issued the Seasoned QM Proposal, 

which was published in the Federal 

Register on August 28, 2020. The 

Bureau proposed to create a new 

category of 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.117 The Bureau stated that 

the primary objective of the Seasoned 

QM Proposal was to ensure access to 

responsible, affordable mortgage credit 

by adding a Seasoned QM definition to 

the existing QM definitions. The Bureau 

proposed that a final rule relating to the 

Seasoned QM Proposal would take 

effect on the same date as a final rule 

relating to the General QM Proposal. 

Under the Seasoned QM Proposal—as 

under the General QM Proposal—the 

revised regulations would apply to 

covered transactions for which creditors 

receive an application on or after this 

effective date. Thus, due to the 36- 

month seasoning period, no loan would 

be eligible to become a Seasoned QM 

until at least 36 months after the 

effective date of a final rule relating to 

the Seasoned QM Proposal. The 

comment period for the Seasoned QM 

Proposal ended on October 1, 2020.118

The Bureau is issuing the Seasoned QM 

Final Rule concurrently with this final 

rule. 

D. The Extension Final Rule 

The Bureau issued the Extension 

Final Rule on October 20, 2020. It was 

published in the Federal Register on 

October 26, 2020. The Extension Final 

Rule amended Regulation Z to replace 

the January 10, 2021 sunset date of the 

Temporary GSE QM loan definition 

with a provision stating that the 

Temporary GSE QM loan definition will 

be available only for covered 

transactions for which the creditor 

receives the consumer’s application 

before the mandatory compliance date 

of final amendments to the General QM 

loan definition in Regulation Z. The 

Extension Final Rule did not amend the 

conservatorship clause.119

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. 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.’’ 120

Title X of the Dodd-Frank Act 

(including section 1061), along with 

TILA and certain subtitles and 

provisions of title XIV of the DoddFrank Act, are Federal consumer 

financial laws.121

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.122 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.’’ 123

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.124

As discussed in the section-by-section 

analysis below, the Bureau is issuing 

certain provisions of this final rule 

pursuant to its rulemaking, adjustment, 


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125 15 U.S.C. 1639c(b)(2)(A). 

126 15 U.S.C. 1639c(b)(3)(B)(i). 

127 15 U.S.C. 1639c(b)(3)(A). 

128 12 U.S.C. 5512(b)(1). 

and exception authority under TILA 

section 105(a). 

TILA section 129C(b)(2)(A). 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).125 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). 

TILA section 129C(b)(3)(A), (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 

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.126 In addition, TILA 

section 129C(b)(3)(A) directs the Bureau 

to prescribe regulations to carry out the 

purposes of section 129C.127 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). 

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.128 TILA and title X of the DoddFrank Act are Federal consumer 

financial laws. Accordingly, the Bureau 

is exercising its authority under DoddFrank 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. 

V. Why the Bureau Is Issuing This Final 

Rule 

The Bureau concludes that this final 

rule’s bright-line pricing thresholds 

strike the best balance between ensuring 

consumers’ ability to repay and 

ensuring access to responsible, 

affordable mortgage credit. The Bureau 

is amending the General QM loan 

definition because retaining the existing 

43 percent DTI limit would reduce the 

size of the QM market and likely would 

lead to a significant reduction in access 

to responsible, affordable credit when 

the Temporary GSE QM definition 

expires. The Bureau continues to 

believe that General QM status should 

be determined by a simple, bright-line 

rule to provide certainty of QM status, 

and the Bureau concludes that pricing 

achieves this objective. Furthermore, the 

Bureau concludes that pricing, rather 

than a DTI limit, is a more appropriate 

standard for the General QM loan 

definition. While not a direct measure of 

financial capacity, loan pricing is 

strongly correlated with early 

delinquency rates, which the Bureau 

uses as a proxy for repayment ability. 

The Bureau concludes that conditioning 

QM status on a specific DTI limit would 

likely impair access to credit for some 

consumers for whom it is appropriate to 

presume their ability to repay their 

loans at consummation. Although a 

pricing limit that is set too low could 

also have this effect, compared to DTI, 

loan pricing is a more flexible metric 

because it can incorporate other factors 

that may also be relevant to determining 

ability to repay, including credit scores, 

cash reserves, or residual income. The 

Bureau concludes that a price-based 

General QM loan definition is better 

than the alternatives because a loan’s 

price, as measured by comparing a 

loan’s APR to APOR for a comparable 

transaction, is a strong indicator of a 

consumer’s ability to repay and is a 

more holistic and flexible measure of a 

consumer’s ability to repay than DTI 

alone. 

A loan’s price is not a direct measure 

of ability to repay, but the Bureau 

concludes that it is an effective indirect 

measure of ability to repay. The final 

rule amends Regulation Z to provide 

that a loan would meet the General QM 

loan definition in § 1026.43(e)(2) only if 

the APR exceeds APOR for a 

comparable transaction by less than 2.25 

percentage points as of the date the 

interest rate is set. The Bureau is 

finalizing a threshold of 2.25 percentage 

points, an increase from the proposed 

threshold of 2 percentage points. The 

Bureau concludes that, for most firstlien covered transactions, a 2.25- 

percentage-point pricing threshold 

strikes the best balance between 

ensuring consumers’ ability to repay 

and ensuring continued access to 

responsible, affordable mortgage credit. 

The final rule provides higher 

thresholds for loans with smaller loan 

amounts and for subordinate-lien 

transactions. As described below, the 

final rule provides an increase from the 

proposed thresholds for some small 

manufactured housing loans to ensure 

consumers have continued access to 

responsible, affordable credit. 

Consistent with the proposal, the 

Bureau is not amending the existing 

General QM loan product-feature and 

underwriting requirements and limits 

on points and fees. 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. The final rule 

removes the 43 percent DTI ratio limit 

and appendix Q and clarifies the 

consider and verify requirements for 

purposes of the General QM loan 

definition. 

The Bureau is preserving the current 

threshold separating safe harbor from 

rebuttable presumption QMs, under 

which a loan is a safe harbor QM if its 

APR exceeds APOR for a comparable 

transaction by less than 1.5 percentage 

points as of the date the interest rate is 

set (or by less than 3.5 percentage points 

for subordinate-lien transactions). 

A. Overview of the Existing General QM 

Loan Definition and the DTI 

Requirement 

TILA section 129C(b)(2) defines QM 

by limiting certain loan terms and 

features. The statute generally prohibits 

a QM from permitting an increase of the 

principal balance on the loan (negative 

amortization), interest-only payments, 

most balloon payments, a term greater 

than 30 years, and points and fees that 

exceed a specified threshold. In 

addition, the statute incorporates 

limited underwriting criteria that 

overlap with some elements of the 

general ATR standard, including 

prohibiting ‘‘no-doc’’ loans where the 

creditor does not verify income or 

assets. TILA does not require DTI ratios 

to be included in the definition of a QM. 

Rather, the statute authorizes, but does 

not require, the Bureau to establish 

additional criteria relating to monthly 

DTI ratios, or alternative measures of 

ability to pay regular expenses after 

payment of total monthly debt, taking 

into account the income levels of the 

consumer and other factors the Bureau 


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129 76 FR 27390, 27453 (May 11, 2011) (2011 

ATR/QM Proposal). 

130 Id. at 27453. 

131 Id. 

132 78 FR 6408, 6516 (Jan. 30, 2013). 

133 Id. at 6526–27. 

134 Id. at 6526. 

135 Id. at 6526–27. 

136 Id. 

137 Id. 

138 Id. 

139 Id. 

140 Id. 

141 Id. 

142 Id. at 6528. 

143 Id. 

144 Id. 

145 Id. 

146 Id. at 6527. 

147 Id. 

148 Id. 

149 Id. at 6528. 

150 Id. 

151 Id. 

determines relevant and consistent with 

the purposes described in TILA section 

129C(b)(3)(B)(i). 

In 2011, the Board proposed two 

alternative approaches to the General 

QM loan definition to implement the 

statutory QM requirements.129 Proposed 

Alternative 1 would have included only 

the statutory QM requirements and 

would not have incorporated the 

consumer’s DTI ratio, residual income, 

or other factors from the general ATR 

standard.130 Proposed Alternative 2 

would have included the statutory QM 

requirements and additional factors 

from the general ATR standard, 

including a requirement to consider and 

verify the consumer’s DTI ratio or 

residual income.131

In the January 2013 Final Rule, the 

Bureau adopted the General QM loan 

definition in § 1026.43(e)(2). The 

existing General QM loan definition 

includes the statutory QM factors and 

additional factors from the general ATR 

standard. The existing General QM loan 

definition also contains a DTI limit of 43 

percent. In adopting this approach in 

the January 2013 Final Rule, the Bureau 

explained that it believed the General 

QM loan definition should include a 

standard for evaluating the consumer’s 

ability to repay, in addition to the 

product feature restrictions and other 

requirements that are specified in 

TILA.132

With respect to DTI, the January 2013 

Final Rule noted that DTI ratios are 

widely used for evaluating a consumer’s 

ability to repay over time because, as the 

available data showed, DTI ratio 

correlates with loan performance as 

measured by delinquency rate.133 The 

January 2013 Final Rule noted that, at 

a basic level, the lower the DTI ratio, the 

greater the consumer’s ability to pay 

back a mortgage loan.134 The Bureau 

believed this relationship between the 

DTI ratio and the consumer’s ability to 

repay applied both under conditions as 

they exist at consummation and under 

future changed circumstances, such as 

increases in payments for adjustablerate mortgages (ARMs), future 

reductions in income, and 

unanticipated expenses and new 

debts.135

To provide certainty for creditors 

regarding the loan’s QM status, the 

January 2013 Final Rule contained a 

specific DTI limit of 43 percent as part 

of the General QM loan definition. The 

Bureau stated that a specific DTI limit 

also provides certainty to assignees and 

investors in the secondary market, 

which the Bureau believed would help 

reduce concerns regarding legal risk and 

promote credit availability.136 The 

Bureau noted that numerous 

commenters had highlighted the value 

of providing objective requirements 

determined based on information 

contained in loan files.137 To address 

concerns that creditors may not have 

adequate certainty about whether a 

particular loan satisfies the 

requirements of the General QM loan 

definition, the Bureau provided 

definitions of debt and income for 

purposes of the General QM loan 

definition in appendix Q.138

The Bureau selected 43 percent as the 

DTI limit for the General QM loan 

definition. Based on analysis of data 

available at the time and comments, the 

Bureau believed that the 43 percent 

limit would advance TILA’s goals of 

creditors not extending credit that 

consumers cannot repay while still 

preserving consumers’ access to 

credit.139 The Bureau acknowledged 

that there is no specific threshold that 

separates affordable from unaffordable 

mortgages; rather, there is a gradual 

increase in delinquency rates as DTI 

ratios increase.140 Additionally, the 

Bureau noted that a 43 percent DTI ratio 

was within the range used by many 

creditors, generally comported with 

industry standards and practices for 

prudent underwriting, and was the 

threshold used by FHA as its general 

boundary at the time the Bureau issued 

the January 2013 Final Rule.141 The 

Bureau noted concerns about setting a 

higher DTI limit, including concerns 

that it could allow QM status for 

mortgages for which there is not a sound 

reason to presume that the creditor had 

a reasonable belief in the consumer’s 

ability to repay.142 The Bureau was 

especially concerned about setting a DTI 

limit higher than 43 percent in the 

context of QMs that receive a safe 

harbor from the ATR requirements.143

The Bureau was also concerned that a 

higher DTI limit would result in a QM 

boundary that substantially covered the 

entire mortgage market. If that were the 

case, creditors might be unwilling to 

make non-QM loans, and the Bureau 

was concerned that the QM rule would 

define the limit of credit availability.144

The Bureau also suggested that a higher 

DTI limit might require a corresponding 

weakening of the strength of the 

presumption of compliance, which the 

Bureau believed would largely defeat 

the point of adopting a higher DTI 

limit.145

The January 2013 Final Rule also 

acknowledged concerns about imposing 

a DTI limit. The Bureau acknowledged 

that the Board, in issuing the 2011 ATR/ 

QM Proposal, found that DTI ratios may 

not have significant predictive power, 

once the effects of credit history, loan 

type, and loan-to-value (LTV) ratio are 

considered.146 Similarly, the Bureau 

noted that some commenters responding 

to the 2011 ATR/QM Proposal suggested 

that the Bureau should include 

compensating factors in addition to a 

specific DTI limit due to concerns about 

restricting access to credit.147 The 

Bureau acknowledged that a standard 

that takes into account multiple factors 

may produce more accurate ability-torepay determinations, at least in specific 

cases, but was concerned that 

incorporating a multi-factor test or 

compensating factors into the General 

QM loan definition would undermine 

the certainty for creditors and the 

secondary market of whether loans were 

eligible for QM status.148 The Bureau 

also acknowledged arguments that 

residual income—generally defined as 

the monthly income that remains after 

a consumer pays all personal debts and 

obligations, including the prospective 

mortgage—may be a better measure of 

repayment ability.149 However, the 

Bureau noted that it lacked sufficient 

data to mandate a bright-line rule based 

on residual income.150 The Bureau 

anticipated further study of the issue as 

part of the five-year assessment of the 

Rule.151

The Bureau acknowledged in the 

January 2013 Final Rule that the 43 

percent DTI limit in the General QM 

loan definition could restrict access to 

credit based on market conditions. 

Among other things, the Bureau 

expressed concern that, as the mortgage 

market recovered from the financial 

crisis, there could be a limited non-QM 

market, which, in conjunction with the 

43 percent DTI limit, could impair 

access to credit for consumers with DTI 


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152 Id. at 6533. 

153See Assessment Report, supra note 63, at 83– 

84, 100–05. 

154 Id. at 104–05. 

155 Id. at 105. 

156See, e.g., id. at 10, 194–96. 

157See, e.g., id. at 10–11, 117, 131–47. 

158See, e.g., Assessment Report supra note 63, at 

150, 153, Table 20. Table 20 illustrates how the 

pool of denied non-GSE eligible applicants with 

DTI ratios above 43 percent has changed between 

2013 and 2014. After the introduction of the Rule, 

the pool of denied applicants contains more 

consumers with higher incomes, higher FICO 

scores, and higher down payments. 

159 78 FR 6408, 6527 (Jan. 30, 2013). 

ratios over 43 percent.152 To preserve 

access to credit for such consumers 

while the market recovered, the Bureau 

adopted the Temporary GSE QM loan 

definition, which did not include a 

specific DTI limit. As discussed below, 

the Temporary GSE QM loan definition 

continues to play a significant role in 

ensuring access to credit for consumers. 

B. Why the Bureau Is Adopting a PriceBased QM Definition To Replace the 

General QM Loan Definition’s DTI Limit 

The Bureau concludes that this final 

rule’s price-based approach best 

balances consumers’ ability to repay 

with ensuring access to responsible, 

affordable mortgage credit. The Bureau 

is amending the General QM definition 

because retaining the existing 43 

percent DTI limit would reduce the size 

of the QM market and likely would lead 

to a significant reduction in access to 

responsible, affordable credit when the 

Temporary GSE QM definition expires. 

The Bureau continues to believe that 

General QM status should be 

determined by a simple, bright-line rule 

to provide certainty of QM status, and 

the Bureau concludes that pricing 

achieves this objective. The Bureau 

concludes that a price-based General 

QM loan definition is better than the 

alternatives because a loan’s price, as 

measured by comparing a loan’s APR to 

APOR for a comparable transaction, is a 

strong indicator of a consumer’s ability 

to repay and is a more holistic and 

flexible measure of a consumer’s ability 

to repay than DTI alone. 

1. Considerations Related to the General 

QM Loan Definition’s DTI Limit 

The proposal described the Bureau’s 

concerns about the 43 percent DTI limit 

and its potentially negative effect on 

access to credit. In particular, the 

Bureau is concerned that imposing a 

DTI limit under the General QM loan 

definition would deny QM status for 

loans to some consumers for whom it is 

appropriate to presume ability to repay 

at consummation and that denying QM 

status to such loans risks denying 

consumers access to responsible, 

affordable credit. The Bureau is 

concerned that the current approach to 

DTI ratios as part of the General QM 

loan definition is not the best approach 

because it would likely impair some 

consumers’ ability to access responsible 

and affordable credit. These access-tocredit concerns are especially acute for 

lower-income and minority consumers. 

The proposal noted that a DTI limit 

may unduly restrict access to credit 

because it provides an incomplete 

picture of the consumer’s financial 

capacity. While the Bureau 

acknowledges that DTI ratios generally 

correlate with loan performance, as the 

Bureau found in the January 2013 Final 

Rule and as shown in recent Bureau 

analysis described below, the proposal 

noted that a consumer’s DTI ratio is 

only one way to measure financial 

capacity and is not necessarily a holistic 

measure of the consumer’s ability to 

repay. The proposal also noted that the 

Bureau’s own experience and the 

feedback it has received from 

stakeholders since issuing the January 

2013 Final Rule suggest that imposing a 

DTI limit as a condition for QM status 

under the General QM loan definition 

may be overly burdensome and complex 

in practice. 

As described in the proposal, the 

Bureau’s Assessment Report highlights 

the tradeoffs of conditioning the General 

QM loan definition on a DTI limit. The 

Assessment Report included specific 

findings about the General QM loan 

definition’s DTI limit, including certain 

findings related to DTI ratios as 

probative of a consumer’s ability to 

repay. The Assessment Report found 

that loans with higher DTI ratios have 

been associated with higher levels of 

‘‘early delinquency’’ (i.e., delinquency 

within two years of origination), which, 

as explained below, may serve as a 

proxy for measuring whether a 

consumer had a reasonable ability to 

repay at the time the loan was 

consummated.153 For example, the 

Assessment Report notes that for all 

periods and samples studied, a positive 

relationship between DTI ratios and 

early delinquency is present and 

economically meaningful.154 The 

Assessment Report states that higher 

DTI ratios independently increase 

expected early delinquency, regardless 

of other underwriting criteria.155

At the same time, findings from the 

Assessment Report indicate that the 

specific 43 percent DTI limit in the 

current rule has restricted access to 

credit, particularly in the absence of a 

robust non-QM market. The report 

found that, for consumers with DTI 

ratios above 43 percent who qualify for 

loans eligible for purchase or guarantee 

by the GSEs, the Rule has not decreased 

access to credit.156 However, the 

Assessment Report attributes the fact 

that the 43 percent DTI limit has not 

reduced access to credit for such 

consumers to the existence of the 

Temporary GSE QM loan definition. 

The findings in the Assessment Report 

indicate that there would be some 

reduction in access to credit for 

consumers with DTI ratios above 43 

percent when the Temporary GSE QM 

loan definition expires, absent changes 

to the General QM loan definition. For 

example, based on application-level 

data obtained from nine large lenders, 

the Assessment Report found that the 

January 2013 Final Rule eliminated 

between 63 and 70 percent of non-GSE 

eligible home purchase loans with DTI 

ratios above 43 percent.157 The proposal 

noted the Bureau’s concern about a 

similar effect for loans with DTI ratios 

above 43 percent when the Temporary 

GSE QM loan definition expires. The 

proposal acknowledged that the 

Assessment Report’s finding, without 

other information, does not prove or 

disprove the effectiveness of the DTI 

limit in achieving the purposes of the 

January 2013 Final Rule in ensuring 

consumers’ ability to repay the loan. If 

the denied applicants in fact lacked the 

ability to repay, then the reduction in 

approval rates is a consequence 

consistent with the purposes of the 

Rule. However, if the denied applicants 

did have the ability to repay, then these 

data suggest an unintended 

consequence of the Rule. This 

possibility is supported by the fact that 

other findings in the Assessment Report 

suggest that applicants for non-GSE 

eligible loans with DTI ratios above 43 

percent are being denied, even though 

other compensating factors indicate that 

some of them may have the ability to 

repay their loans.158

The current condition of the non-QM 

market heightens the access-to-credit 

concerns related to the specific 43 

percent DTI limit, particularly if such 

conditions persist after the expiration of 

the Temporary GSE QM loan definition. 

The Bureau stated in the January 2013 

Final Rule that it believed mortgages 

that could be responsibly originated 

with DTI ratios that exceed 43 percent, 

which historically includes over 20 

percent of mortgages, would be made 

under the general ATR standard.159

However, the Assessment Report found 

that a robust market for non-QM loans 

above the 43 percent DTI limit has not 

materialized as the Bureau had 


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86320 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

160Assessment Report, supra note 63, at 198. 

161 Id. at 198. 

162Proposed Rule’s Dodd-Frank Act section 

1022(b) analysis (citing the Bureau’s prior estimate 

of affected loans in the ANPR); see 84 FR 37155, 

37159 (July 31, 2019). 

163 Id. at 37159 n.58. 

164 In fiscal year 2019, approximately 57 percent 

of FHA-insured purchase mortgages had a DTI ratio 

above 43 percent. U.S. Dep’t of Hous. & Urban Dev., 

Annual Report to Congress Regarding the Financial 

Status of the FHA Mutual Mortgage Insurance 

Fund, Fiscal Year 2019, at 33 (using data from App. 

B Tbl. B9) (Nov. 14, 2018), https://www.hud.gov/ 

sites/dfiles/Housing/documents/2019FHAAnnual

ReportMMIFund.pdf. 

165 84 FR 37155, 37159 (July 31, 2019). 

166 Id. In 2018, FHA’s county-level maximum 

loan limits ranged from $294,515 to $679,650 in the 

continental United States. See U.S. Dep’t of Hous. 

& Urban Dev., FHA Mortgage Limits, https://

entp.hud.gov/idapp/html/hicostlook.cfm (last 

visited Dec. 8, 2020). 

167 84 FR 37155, 37159 (July 31, 2019). 168 Interest rates and insurance premiums on FHA 

loans generally feature less risk-based pricing than 

conventional loans, charging more similar rates and 

premiums to all consumers. As a result, they are 

likely to cost more than conventional loans for 

consumers with stronger credit scores and larger 

down payments. Consistent with this pricing 

differential, consumers with higher credit scores 

and larger down payments chose FHA loans 

relatively rarely in 2018 HMDA data on mortgage 

originations. See Bureau of Consumer Fin. Prot., 

Introducing New and Revised Data Points in HMDA 

(Aug. 2019), https://files.consumerfinance.gov/f/ 

documents/cfpb_new-revised-data-points-in-hmda_

report.pdf. 169 84 FR 37155, 37159 (July 31, 2019). 170See 12 CFR 1026.43(e)(5) (extending QM 

status to certain portfolio loans originated by 

certain small creditors). In addition, section 101 of 

the Economic Growth, Regulatory Relief, and 

Consumer Protection Act, Public Law 115–174, 132 

Stat. 1296 (2018), amended TILA to add a safe 

harbor for small creditor portfolio loans. See 15 

U.S.C. 1639c(b)(2)(F). 

171 84 FR 37155, 37159 (July 31, 2019). 

172 Id. 

173 Id. 

predicted. Therefore, there is limited 

capacity in the non-QM market to 

provide access to credit after the 

expiration of the Temporary GSE QM 

loan definition.160 As described above, 

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 QM lending space. 

The Bureau acknowledges the slow 

development of the non-QM market 

since the January 2013 Final Rule took 

effect and further acknowledges that the 

recent economic disruptions associated 

with the COVID–19 pandemic may 

significantly hinder its development in 

the near term. 

At the time of the January 2013 Final 

Rule, the Bureau adopted the 

Temporary GSE loan definition to 

provide a period for economic, market, 

and regulatory conditions to stabilize 

and for a reasonable transition period to 

the General QM loan definition and 

non-QM loans above a 43 percent DTI 

ratio. However, contrary to the Bureau’s 

expectations, lending largely has 

remained in the Temporary GSE QM 

space, and a sizable market to support 

non-QM lending has not yet emerged.161

As noted above, the Bureau 

acknowledges that the recent economic 

disruptions associated with the COVID– 

19 pandemic may further hinder the 

development of the non-QM market, at 

least in the near term. As noted in the 

proposal, the Bureau expects that a 

significant number of Temporary GSE 

QMs would not qualify as General QMs 

under the current rule after the 

Temporary GSE QM loan definition 

expires, either because they have DTI 

ratios above 43 percent or because their 

method of documenting and verifying 

income or debt is incompatible with 

appendix Q. Some alternative loan 

options would still be available to many 

consumers after the expiration of the 

Temporary GSE QM loan definition. 

The proposal, however, emphasized the 

Bureau’s expectation that, with respect 

to loans that are currently Temporary 

GSE QMs and would not otherwise 

qualify as General QMs under the 

current definition, some would cost 

materially more for consumers and 

some would not be made at all. 

Based on 2018 data, the Bureau 

estimated in the proposal that, as a 

result of the General QM loan 

definition’s 43 percent DTI limit, 

approximately 957,000 loans—16 

percent of all closed-end first-lien 

residential mortgage originations in 

2018—would be affected by the 

expiration of the Temporary GSE QM 

loan definition.162 These loans are 

currently originated as QMs due to the 

Temporary GSE QM loan definition but 

would not be originated under the 

current General QM loan definition, and 

might not be originated at all, if the 

Temporary GSE QM loan definition 

were to expire. An additional, smaller 

number of loans that currently qualify 

as Temporary GSE QMs may not fall 

within the General QM loan definition 

after the expiration of the Temporary 

GSE QM loan definition because the 

method used for verifying income or 

debt would not comply with appendix 

Q.163 As explained in the Extension 

Final Rule, the Temporary GSE QM loan 

definition will expire on the mandatory 

compliance date of this final rule or 

when GSE conservatorship ends. 

As explained in the proposal, the 

Bureau believes that many loans 

currently originated under the 

Temporary GSE QM loan definition 

would cost materially more or may not 

be made at all, absent changes to the 

General QM loan definition. After the 

Temporary GSE QM loan definition 

expires, the Bureau expects that many 

consumers with DTI ratios above 43 

percent who would have received a 

Temporary GSE QM would instead 

obtain FHA-insured loans since FHA 

currently insures loans with DTI ratios 

up to 57 percent.164 The number of 

loans that move to FHA would depend 

on FHA’s willingness and ability to 

insure such loans, whether FHA 

continues to treat all loans that it 

insures as QMs under its own QM rule, 

and how many loans that would have 

been originated as Temporary GSE QMs 

with DTI ratios above 43 percent exceed 

FHA’s loan-amount limit.165 For 

example, the Bureau estimated in the 

proposal that, in 2018, 11 percent of 

Temporary GSE QM loans with DTI 

ratios above 43 percent exceeded FHA’s 

loan-amount limit.166 Thus, the Bureau 

considers that at most 89 percent of 

loans that would have been Temporary 

GSE QMs with DTI ratios above 43 

percent could move to FHA.167 The 

Bureau expects that loans that would be 

originated as FHA loans instead of 

under the Temporary GSE QM loan 

definition generally would cost 

materially more for many consumers.168

The Bureau expects that some 

consumers offered FHA loans might 

choose not to take out a mortgage 

because of these higher costs. 

The proposal explained that it is also 

possible that some consumers with DTI 

ratios above 43 percent would be able to 

obtain loans in the private market.169

The number of loans absorbed by the 

private market would likely depend, in 

part, on whether actors in the private 

market would be willing to assume the 

legal or credit risk associated with 

funding loans—as non-QM loans or 

small-creditor portfolio QMs—that 

would have been Temporary GSE QMs 

(with DTI ratios above 43 percent) 170

and, if so, whether actors in the private 

market would offer lower prices or 

better terms.171 For example, the Bureau 

estimated that 55 percent of loans that 

would have been Temporary GSE QMs 

(with DTI ratios above 43 percent) in 

2018 had credit scores at or above 680 

and LTV ratios at or below 80 percent— 

credit characteristics traditionally 

considered attractive to actors in the 

private market.172 At the same time, the 

Assessment Report found there has been 

limited momentum toward a greater role 

for private market non-QM loans. It is 

uncertain how great this role will be in 

the future,173 particularly in the short 

term due to the economic effects of the 

COVID–19 pandemic. Finally, the 

proposal noted that some consumers 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86321 

174 Id. 

175 Id. 

176See Assessment Report, supra note 63, at 10– 

11, 117, 131–47. 

177 Id. at 193. 

178 Id. at 193–94. 

179See, e.g., Norbert Michel, The Best Housing 

Finance Reform Options for the Trump 

Administration, Forbes (July 15, 2019), https://

www.forbes.com/sites/norbertmichel/2019/07/15/ 

the-best-housing-finance-reform-options-for-thetrump-administration/#4f5640de7d3f; Eric Kaplan 

et al., Milken Institute, A Blueprint for 

Administrative Reform of the Housing Finance 

System, at 17 (2019), https://

assets1b.milkeninstitute.org/assets/Publication/ 

Viewpoint/PDF/Blueprint-Admin-Reform-HFSystem-1.7.2019-v2.pdf (suggesting that the Bureau 

both (1) expand the 43 percent DTI limit to 45 

percent to move market share of higher-DTI loans 

from the GSEs and FHA to the non-agency market, 

and (2) establish a residual income test to protect 

against the risk of higher DTI loans); Morris Davis 

et al., A Quarter Century of Mortgage Risk (FHFA, 

Working Paper 19–02, 2019), https://www.fhfa.gov/ 

PolicyProgramsResearch/Research/Pages/ 

wp1902.aspx (examining various loan 

characteristics and a summary measure of risk—the 

stressed default rate—for predictiveness of loan 

performance). 

with DTI ratios above 43 percent who 

would have sought Temporary GSE QM 

loans may adapt to changing options 

and make different choices, such as 

adjusting their borrowing to result in a 

lower DTI ratio.174 However, some 

consumers who would have sought 

Temporary GSE QMs (with DTI ratios 

above 43 percent) may not obtain loans 

at all.175 For example, based on 

application-level data obtained from 

nine large lenders, the Assessment 

Report found that the January 2013 

Final Rule eliminated between 63 and 

70 percent of non-GSE-eligible home 

purchase loans with DTI ratios above 43 

percent.176

As noted in the proposal, the Bureau 

also has particular concerns about the 

effects of the appendix Q definitions of 

debt and income on access to credit. 

The Bureau intended for appendix Q to 

provide creditors with certainty about 

the DTI ratio calculation to foster 

compliance with the General QM loan 

definition. However, based on extensive 

stakeholder feedback and the Bureau’s 

own experience, the proposal 

recognized that appendix Q’s 

definitions of debt and income are rigid 

and difficult to apply and do not 

provide the level of compliance 

certainty that the Bureau anticipated. 

Stakeholders have reported that these 

concerns are particularly acute for 

transactions involving self-employed 

consumers, consumers with part-time 

employment, and consumers with 

irregular or unusual income streams. 

The proposal expressed concern that the 

standards in appendix Q could 

negatively impact access to credit for 

these consumers, particularly after 

expiration of the Temporary GSE QM 

loan definition. The Assessment Report 

also noted concerns with the perceived 

lack of clarity in appendix Q and found 

that such concerns ‘‘may have 

contributed to investors’—and at least 

derivatively, creditors’—preference’’ for 

Temporary GSE QMs.177 Appendix Q, 

unlike other standards for calculating 

and verifying debt and income, has not 

been revised since 2013.178 The current 

definitions of debt and income in 

appendix Q have proven to be complex 

in practice. In the proposal, the Bureau 

expressed concerns about other 

potential approaches to defining debt 

and income in connection with 

conditioning QM status on a specific 

DTI limit. 

The current approach to DTI ratios 

under the General QM loan definition 

may also stifle innovation in 

underwriting because it focuses on a 

single metric, with strict verification 

standards under appendix Q, which 

may constrain new approaches to 

assessing repayment ability. Such 

innovations include certain new uses of 

cash flow data and analytics to 

underwrite mortgage applicants. This 

emerging technology has the potential to 

accurately assess consumers’ ability to 

repay using, for example, bank account 

data that can identify the source and 

frequency of recurring deposits and 

payments and identify remaining 

disposable income. Identifying the 

remaining disposable income could be a 

method of assessing the sufficiency of a 

consumer’s residual income and could 

potentially satisfy a requirement to 

consider either DTI or residual income. 

This innovation could potentially 

expand access to responsible, affordable 

mortgage credit, particularly for 

applicants with non-traditional income 

and limited credit history. The proposal 

expressed concern that the potential 

negative effect of the current General 

QM loan definition on innovation in 

underwriting may be heightened while 

the market is largely concentrated in the 

QM lending space and may limit access 

to credit for some consumers with DTI 

ratios above 43 percent. 

2. The Proposed Price-Based General 

QM Loan Definition 

In light of these concerns, the Bureau 

proposed to remove the 43 percent DTI 

limit from the General QM loan 

definition in § 1026.43(e)(2)(vi) and 

replace it with a requirement based on 

the price of the loan. In issuing the 

proposal, the Bureau acknowledged the 

significant debate 179 over whether loan 

pricing, a consumer’s DTI ratio, or 

another direct or indirect measure of a 

consumer’s personal finances is a better 

predictor of loan performance, 

particularly when analyzed across 

various points in the economic cycle. In 

seeking comments on the proposal, the 

Bureau noted that it was not making a 

determination as to whether DTI ratios, 

a loan’s price, or some other measure is 

the best predictor of loan performance. 

Rather, the analyses provided by 

stakeholders and the Bureau’s own 

analysis show that pricing is strongly 

correlated with loan performance, based 

on early delinquency rates, across a 

variety of loans and economic 

conditions. The Bureau acknowledged 

that DTI is also predictive of loan 

performance and that other direct and 

indirect measures of consumer finances 

may also be predictive of loan 

performance. However, the Bureau 

weighed several policy considerations 

in selecting an approach for the 

proposal based on the purposes of the 

ATR/QM provisions of TILA. 

In proposing a price-based General 

QM loan definition, the Bureau sought 

to balance considerations related to 

ensuring consumers’ ability to repay 

and maintaining access to credit. As 

noted in the proposal, the Bureau views 

the relevant provisions of TILA as 

fundamentally about assuring that 

consumers receive mortgage credit that 

they can repay. However, the Bureau 

also stated its concern about 

maintaining access to responsible, 

affordable mortgage credit. The proposal 

noted the Bureau’s concern that the 

current General QM loan definition, 

with a 43 percent DTI limit, would 

result in a significant reduction in the 

scope of the QM market and could 

reduce access to responsible, affordable 

mortgage credit after the Temporary 

GSE QM loan definition expires. The 

lack of a robust non-QM market 

enhances those concerns. Although it 

remains possible that, over time, a 

substantial market for non-QM loans 

will emerge, that market has developed 

slowly, and the recent economic 

disruptions associated with the COVID– 

19 pandemic may significantly hinder 

its development, at least in the near 

term. 

With respect to ability to repay, the 

proposal focused on analysis of early 

delinquency rates 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), is an appropriate 

measure of whether a loan should be 

presumed to comply with the ATR 

provisions. The proposal noted that, 

because the affordability of a given 

mortgage will vary from consumer to 


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180See Assessment Report, supra note 63, at 83. 

181The 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. 182HMDA was originally enacted by Congress in 

1975 and is implemented by Regulation C, 12 CFR 

part 1003. See Bureau of Consumer Fin. Prot., 

Mortgage data (HMDA), https://

www.consumerfinance.gov/data-research/hmda/ 

(last visited Dec. 8, 2020). HMDA requires many 

financial institutions to maintain, report, and 

publicly disclose loan-level information about 

mortgages. These data are housed here to help show 

whether lenders 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. The public data are 

modified to protect applicant and borrower privacy. 

183See Neil Bhutta and Benjamin J. Keys, Eyes 

Wide Shut? The Moral Hazard of Mortgage Insurers 

during the Housing Boom, (NBER Working Paper 

No. 24844, 2018), https://www.nber.org/papers/ 

w24844.pdf. APOR is approximated with weekly 

Freddie Mac Primary Mortgage Market Survey 

(PMMS) data, retrieved from Fed. Reserve Bank of 

St. Louis, Fed. Reserve Econ. Data, https://

fred.stlouisfed.org/ (Mar. 4, 2020). Each loan’s APR 

is approximated by the sum of the interest rate in 

the NMDB data and an assumed PMI payment of 

0.32, 0.52, or 0.78 percentage points for loans with 

LTVs above 80 but at or below 85, above 85 but at 

or below 90, and above 90, respectively. These PMI 

are based on standard industry rates during this 

time period. The 30-year Fixed Rate PMMS average 

is used for fixed-rate loans with terms over 15 years, 

and 15-year Fixed Rate PMMS is used for loans 

with terms of 15 years or less. The 5/1-year 

Adjustable-Rate PMMS average is used (for 

available years) for ARMs with a first interest rate 

reset occurring 5 or more years after origination, 

while the 1-year adjustable-rate PMMS average is 

used for all other ARMs. 

184Loans with rate spreads of 2.25 percentage 

points or more are grouped in Tables 1 and 5 to 

ensure sufficient sample size for reliable analysis of 

the 2002–2008 data. This grouping ensures that all 

cells shown in Table 5 contain at least 500 loans. 

185Freddie Mac’s PMMS is the source of data 

underlying APOR for most mortgages. See supra 

note 183 for additional details. 

186Where possible, the FHFA provided an 

anonymized match of HMDA loan identifiers for 

2018 NMDB originations, allowing the Bureau to 

analyze more detailed HMDA loan characteristics 

(e.g., rate spread over APOR) for approximately half 

of 2018 NMDB originations. 

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 

reasonably within consumers’ ability to 

repay. As such, consistent with the 

Bureau’s prior analyses in the 

Assessment Report, the Bureau’s 

analysis in the proposal used early 

distress as a proxy for the lack of the 

consumer’s ability to repay at 

consummation across a wide pool of 

loans. Specifically, and consistent with 

the Assessment Report,180 the proposal 

measured early distress as whether a 

consumer was ever 60 or more days past 

due within the first two years after 

origination (referred to herein as the 

early delinquency rate). The Bureau’s 

analysis focused on early delinquency 

rates to capture consumers’ difficulties 

in making payments soon after 

consummation of the loan (i.e., within 

the first two years), even if these 

delinquencies do not lead to consumers 

potentially losing their homes (i.e., 60 or 

more days past due, as opposed to 90 or 

more days or in foreclosure), as early 

difficulties in making payments indicate 

a higher likelihood that the consumer 

may have lacked ability to repay at 

consummation. As in the Assessment 

Report, the Bureau assumed that the 

average early delinquency rate across a 

wide pool of mortgages—whether safe 

harbor QM, rebuttable presumption QM, 

or non-QM—is probative of whether 

such loans are reasonably within 

consumers’ repayment ability. The 

Bureau acknowledged that alternative 

measures of delinquency, including 

those used in analyses submitted as 

comments on the ANPR, may also be 

probative of repayment ability. 

In issuing the proposal, the Bureau 

reviewed available evidence to assess 

whether rate spreads can distinguish 

loans that are likely to have low early 

delinquency rates, and thus may be 

presumed to comply with the ATR 

requirements, from loans that are likely 

to have higher rates of early 

delinquency, for which a presumption 

of compliance with the ATR 

requirements would not be warranted. 

The proposal stated that the Bureau’s 

own analysis and analyses published in 

response to the Bureau’s ANPR and RFIs 

provide strong evidence of increasing 

early delinquency rates with higher rate 

spreads across a range of datasets, time 

periods, loan types, measures of rate 

spread, and measures of delinquency. 

The Bureau’s delinquency analysis used 

data from the National Mortgage 

Database (NMDB),181 including a 

matched sample of NMDB and HMDA 

loans.182 As noted in the proposal, the 

analysis shows that delinquency rates 

rise with rate spread. The Bureau’s 

delinquency analysis is described 

below. Table numbers in part V match 

those from the Bureau’s proposal, 

except that Tables 7A and 8A in part 

V.B.5, below, did not appear in the 

proposal. 

Table 1 shows early delinquency rates 

for 2002–2008 first-lien purchase 

originations in the NMDB, with loans 

categorized according to their 

approximate rate spread. The Bureau 

analyzed 2002 through 2008 origination 

years because the relatively fixed 

private mortgage insurance (PMI) 

pricing during these years allows for 

reliable approximation of this important 

component of rate spreads.183 The 

sample is restricted to loans without 

product features that would make them 

non-QM loans under the current rule. 

Table 1 shows that early delinquency 

rates increase consistently with rate 

spreads, from a low of 2 percent among 

loans with rate spreads below or near 

zero, up to 14 percent for loans with rate 

spreads of 2.25 percentage points or 

more over APOR.184 This sample 

includes loans originated during the 

peak of the housing boom and 

delinquencies that occurred during the 

ensuing recession, contributing to the 

high overall levels of early delinquency. 

TABLE 1—2002–2008 ORIGINATIONS, 

EARLY DELINQUENCY RATE BY RATE

SPREAD

Rate spread 

(interest rate + PMI 

approximation¥PMMS185) 

in percentage points 

Early 

delinquency rate 

(%) 

<0 ...................................... 2 

0–0.24 ............................... 2 

0.25–0.49 .......................... 4 

0.50–0.74 .......................... 5 

0.75–0.99 .......................... 6 

1.00–1.24 .......................... 8 

1.25–1.49 .......................... 10 

1.50–1.74 .......................... 12 

1.75–1.99 .......................... 13 

2.00–2.24 .......................... 14 

2.25 and above ................. 14 

The proposal noted that analysis of 

additional data, as reflected in Table 2, 

also shows early delinquency rates 

rising with rate spread. Table 2 shows 

early delinquency statistics for 2018 

NMDB first-lien purchase originations 

that have been matched to 2018 HMDA 

data, enabling the Bureau to use actual 

rate spreads over APOR rather than 

approximated rate spreads in its 

analysis.186 As with the data reflected in 

Table 1, loans with product features that 

would make them non-QM under the 

current rule are excluded from Table 2. 

However, only delinquencies occurring 

through December 2019 are observed in 

Table 2, meaning most loans are not 

observed for a full two years after 

origination. This more recent sample 

provides insight into early delinquency 

rates under post-crisis lending 

standards, and for an origination cohort 

that had not undergone (as of December 

2019) a large economic downturn. The 

2018 data are divided into wider bins 

(as compared to Table 1) to ensure 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86323 

187Loans with rate spreads of 2 percentage points 

or more are grouped in Tables 2 and 6 to ensure 

sufficient sample size for reliable analysis of the 

2018 data. This grouping ensures that all cells 

shown in Table 6 contain at least 500 loans. 

188Fewer than 0.7 percent of loans have reported 

DTI ratios over 70 percent in the 2002–2008 data. 

These loans are excluded from Tables 3 and 5 due 

to reliability concerns (including outliers which 

may reflect reporting errors) and to ensure that all 

cells shown in Table 5 contain at least 500 loans. 

189Fewer than 0.5 percent of loans have reported 

DTI ratios over 50 percent in the 2018 data. These 

loans are excluded from Tables 4 and 6 due to 

reliability concerns (including outliers which may 

reflect reporting errors) and to ensure that all cells 

shown in Table 6 contain at least 500 loans. 

enough loans per bin. As with Table 1, 

the proposal noted that Table 2 shows 

that early delinquency rates increase 

consistently with rate spreads, from a 

low of 0.2 percent for loans with rate 

spreads near APOR or below APOR, up 

to 4.2 percent for loans with rate 

spreads of 2 percentage points or more 

over APOR.187

TABLE 2—2018 ORIGINATIONS, EARLY

DELINQUENCY RATE BY RATE SPREAD

Rate spread over APOR 

in percentage points 

Early 

delinquency rate 

(as of Dec. 2019) 

(%) 

<0 .................................... 0.2 

0–0.49 ............................. 0.2 

0.50–0.99 ........................ 0.6 

1.00–1.49 ........................ 1.7 

1.50–1.99 ........................ 2.7 

2.00 and above ............... 4.2 

Given the specific DTI limit under the 

current rule, the Bureau also analyzed 

the relationship between DTI ratios and 

early delinquency for the same samples 

of loans in Tables 3 and 4. As described 

in the proposal, the Bureau’s analyses 

show that early delinquency rates 

increase consistently with DTI ratio in 

both samples. In the 2002–2008 sample, 

early delinquency rates increase from a 

low of 3 percent among loans with DTI 

ratios at or below 25 percent, up to 9 

percent for loans with DTI ratios 

between 61 and 70 percent.188 In the 

2018 sample, early delinquency rates 

increase from 0.4 percent among loans 

with DTI ratios at or below 25 percent, 

up to 0.9 percent among loans with DTI 

ratios between 44 and 50.189 The 

difference in early delinquency rates 

between loans with the highest and 

lowest DTI ratios is smaller than the 

difference in early delinquency rates 

between the highest and lowest rate 

spreads during both periods. The 

proposal explained that, for these 

samples and bins of rate spread and DTI 

ratios, this pattern is consistent with a 

stronger correlation between rate spread 

and early delinquency than between 

DTI ratios and early delinquency. 

TABLE 3—2002–2008 ORIGINATIONS, 

EARLY DELINQUENCY RATE BY DTI 

RATIO

DTI 

Early 

delinquency rate 

(%) 

0–20 ................................ 3 

21–25 .............................. 3 

26–30 .............................. 4 

31–35 .............................. 5 

36–40 .............................. 6 

41–43 .............................. 6 

44–45 .............................. 7 

46–48 .............................. 7 

49–50 .............................. 8 

51–60 .............................. 8 

61–70 .............................. 9 

TABLE 4—2018 ORIGINATIONS, EARLY

DELINQUENCY RATE BY DTI 

DTI 

Early 

delinquency rate 

(as of Dec. 2019) 

(%) 

0–25 ................................ 0.4 

26–35 .............................. 0.5 

36–43 .............................. 0.7 

44–48 .............................. 0.9 

TABLE 4—2018 ORIGINATIONS, EARLY

DELINQUENCY RATE BY DTI—Continued 

DTI 

Early 

delinquency rate 

(as of Dec. 2019) 

(%) 

49–50 .............................. 0.9 

The proposal further analyzed the 

strengths of DTI ratios and pricing in 

predicting early delinquency rates in 

Tables 5 and 6, which show the early 

delinquency rates of these same samples 

categorized according to both their DTI 

ratios and their rate spreads. Table 5 

shows early delinquency rates for 2002– 

2008 first-lien purchase originations in 

the NMDB, with loans categorized 

according to both their DTI ratio and 

their approximate rate spread. For loans 

within a given DTI ratio range, those 

with higher rate spreads consistently 

had higher early delinquency rates. 

Loans with low rate spreads had 

relatively low early delinquency rates 

even at high DTI ratio levels, as seen in 

the 2 percent early delinquency rate for 

loans priced below APOR but with DTI 

ratios of 46 to 48 percent, 51 to 60 

percent, and 61 to 70 percent. However, 

the highest early delinquency rates 

occurred for loans with high rate 

spreads and high DTI ratios, reaching 26 

percent for loans priced 2 to 2.24 

percentage points above APOR with DTI 

ratios of 61 to 70 percent. Across DTI 

bins, loans priced significantly above 

APOR had early delinquency rates 

much higher than loans priced below 

APOR. 

TABLE 5—2002–2008 ORIGINATIONS, EARLY DELINQUENCY RATE BY RATE SPREAD AND DTI RATIO

Rate spread (interest rate + PMI approx.¥PMMS) 

in percentage points 

DTI 

0–20 

(%) 

DTI 

21–25 

(%) 

DTI 

26–30 

(%) 

DTI 

31–35 

(%) 

DTI 

36–40 

(%) 

DTI 

41–43 

(%) 

DTI 

44–45 

(%) 

DTI 

46–48 

(%) 

DTI 

49–50 

(%) 

DTI 

51–60 

(%) 

DTI 

61–70 

(%) 

<0 ........................................................................... 2 1 1 2 2 2 2 2 3 2 2 

0–0.24 .................................................................... 2 2 2 2 2 3 3 3 3 3 3 

0.25–0.49 ............................................................... 3 3 3 3 4 5 4 5 5 5 5 

0.50–0.74 ............................................................... 4 4 4 4 5 6 6 6 7 7 7 

0.75–0.99 ............................................................... 4 5 5 6 6 7 7 7 8 8 10 

1.00–1.24 ............................................................... 6 6 6 7 7 9 9 9 10 11 13 

1.25–1.49 ............................................................... 6 7 8 8 10 11 12 12 12 14 15 

1.50–1.74 ............................................................... 7 8 9 10 13 13 15 14 16 15 20 

1.75–1.99 ............................................................... 7 8 10 12 14 15 16 16 16 18 22 

2.00–2.24 ............................................................... 6 10 10 12 15 15 17 19 18 20 26 

2.25 and above ...................................................... 7 9 10 13 15 16 16 18 19 20 25 


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86324 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

190As in Tables 2 and 4, above, the 2018 data are 

divided into larger bins to ensure enough loans per 

bin. Loans with a DTI ratio greater than 50 percent 

are excluded, as well as loans with a DTI ratio at 

or below 25 percent and rate spreads of 1.5 

percentage points and above, because these bins 

contained fewer than 500 loans in the matched 

2018 NMDB–HMDA sample. 

191See Archana Pradhan & Pete Carroll, 

Expiration of the CFPB’s Qualified Mortgage (QM) 

GSE Patch—Part V, CoreLogic Insights Blog (Jan. 

13, 2020), https://www.corelogic.com/blog/2020/1/ 

expiration-of-the-cfpbs-qualified-mortgage-qm-gsepatch-part-v.aspx. Delinquency was measured as of 

October 2019, so loans do not have two full years 

of payment history. 

192The Bureau analyzes the performance and 

pricing for smaller loans in the section-by-section 

analysis for § 1026.43(e)(2)(vi). 

193See Archana Pradhan & Pete Carroll, 

Expiration of the CFPB’s Qualified Mortgage (QM) 

GSE Patch—Part IV, CoreLogic Insights Blog (Jan. 

11, 2020), https://www.corelogic.com/blog/2020/1/ 

expiration-of-the-cfpbs-qualified-mortgage-qm-gsepatch-part-iv.aspx. (Delinquency measured as of 

October 2019.) 

194See Karan Kaul & Laurie Goodman, Urban 

Inst., Updated: What, If Anything, Should Replace 

QM GSE Patch, at 9 (Oct. 2020), https://

www.urban.org/sites/default/files/publication/ 

99268/2018_10_30_qualified_mortgage_rule_

update_finalized_4.pdf. 

195See Karan Kaul et al., Urban Inst., Comment 

Letter to the Consumer Financial Protection Bureau 

on the Qualified Mortgage Rule, at 9–10 (Sept. 

2019), https://www.urban.org/sites/default/files/ 

publication/101048/comment_letter_to_the_

consumer_financial_protection_bureau_0.pdf. 

Similarly, Table 6 shows average early 

delinquency statistics, with loans 

categorized according to both DTI and 

rate spread, for the sample of 2018 

NMDB first-lien purchase originations 

that have been matched to 2018 HMDA 

data.190 For Table 6, the higher early 

delinquency rate for loans with higher 

rate spreads over APOR matches the 

pattern shown in the data from Table 5. 

Overall early delinquency rates are 

substantially lower, reflecting the 

importance of economic conditions in 

the likelihood of delinquency for any 

given consumer. However, the 2018 

loans priced significantly above APOR 

also had early delinquency rates much 

higher than loans priced below APOR. 

TABLE 6—2018 ORIGINATIONS, EARLY DELINQUENCY RATE BY RATE SPREAD AND DTI RATIO

Rate spread over APOR in percentage points 

DTI 

0–25 

(%) 

DTI 

26–35 

(%) 

DTI 

36–43 

(%) 

DTI 

44–50 

(%) 

<0 ..................................................................................................................... 0.1 0.1 0.2 0.3 

0–0.49 .............................................................................................................. 0.2 0.1 0.3 0.3 

0.50–0.99 ......................................................................................................... 0.1 0.4 0.8 0.8 

1.00–1.49 ......................................................................................................... 1.0 1.4 1.5 2.3 

1.50–1.99 ......................................................................................................... ........................ 3.2 2.5 2.3 

2.00 and above ................................................................................................ ........................ 4.4 3.9 4.2 

The proposal noted that the high 

relative risk of early delinquency for 

higher-priced loans holds across 

samples, demonstrating that rate 

spreads distinguish early delinquency 

risk under a range of economic 

conditions and creditor practices. The 

proposal also highlighted that analyses 

published in response to the Bureau’s 

ANPR and RFIs are consistent with the 

Bureau’s analysis showing that early 

delinquency rates rise consistently with 

rate spread. For example, CoreLogic 

analyzed a set of 2018 HMDA 

conventional mortgage originations 

merged to loan performance data 

collected from mortgage servicers.191

The CoreLogic analysis found: (1) The 

lowest delinquency rates among loans 

with rate spreads that are below APOR, 

and (2) increased early delinquency 

rates for each sequentially higher bin of 

rate spreads up to 2 percentage points 

over APOR. In assessing the CoreLogic 

analysis, the Bureau noted that loans 

priced at or above 2 percentage points 

over APOR in the 2018 HMDA data are 

relatively rare and are 

disproportionately made for 

manufactured housing and smaller loan 

amounts and therefore may not be well 

represented in mortgage servicing 

datasets. However, the proposal noted 

that these loans also have relatively high 

rates of delinquency.192 CoreLogic 

found a similar, but more variable, 

positive relationship between rate 

spreads over APOR and delinquency in 

earlier cohorts (2010–2017) of merged 

HMDA-CoreLogic originations, a period 

in which rate spreads were only 

reported for loans priced at least 1.5 

percentage points over APOR.193 The 

proposal also noted that analyses by the 

Urban Institute (using loan performance 

data from Black Knight) show a 

comparable positive relationship 

between rate spreads—measured there 

as the note rate over PMMS—and 

delinquency.194 The analysis found that 

the relationship holds across a range of 

loan types (conventional loans held in 

portfolio, in GSE securitizations, and in 

private securitizations; FHA loans; VA 

loans) and years (1995–2018). 

Additional analyses by the Urban 

Institute show the same positive 

relationship between rate spread and 

loan performance in Fannie Mae loanlevel performance data.195

The proposal stated that, collectively, 

this evidence suggests that higher rate 

spreads—including the specific measure 

of APR over APOR—are strongly 

correlated with early delinquency rates. 

Given that early delinquency captures 

consumers’ difficulty making required 

payments, the proposal preliminarily 

concluded that rate spreads provide a 

strong indicator of ability to repay. 

The proposal acknowledged that a test 

that combines rate spread and DTI may 

better predict early delinquency rates 

than either metric on its own. However, 

the proposal also noted that any rule 

with a specific DTI limit would need to 

provide standards for calculating the 

income that may be counted and the 

debt that must be counted so that 

creditors and investors can ensure with 

reasonable certainty that they have 

accurately calculated DTI within the 

specific DTI limit. As noted above, the 

current definitions of debt and income 

in appendix Q have proven to be 

complex in practice and may unduly 

restrict access to credit. The proposal 

expressed concerns about whether other 

potential approaches could define debt 

and income with sufficient clarity while 

at the same time providing flexibility to 

accommodate new approaches to 

verification and underwriting. 

In addition to strongly correlating 

with loan performance, the proposal 

tentatively concluded that a price-based 

General QM loan definition is a more 

holistic and flexible measure of a 

consumer’s ability to repay than DTI 

alone. The proposal explained that 

mortgage underwriting, and by 

extension, a loan’s price, generally 

includes consideration of a consumer’s 

DTI. However, the proposal explained 

that loan pricing also includes an 

assessment of additional factors that 

might compensate for a higher DTI ratio 

and that might also be probative of a 

consumer’s ability to repay. One of the 

primary criticisms of the current 43 

percent DTI ratio is that it is too limited 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86325 

196See TILA section 103(aa)(i); Regulation Z 

§ 1026.32(a)(1)(i). TILA and Regulation Z also 

provide a separate price-based coverage trigger 

based on the points and fees charged on a loan. See 

TILA section 130(aa)(ii); Regulation Z 

§ 1026.32(a)(1)(ii). 

197See generally 73 FR 44522 (July 30, 2008). 198The Board’s 2008 rule was superseded by the 

January 2013 Final Rule, which imposed ability-torepay requirements on a broader range of closedend consumer credit transactions secured by a 

dwelling. See generally 78 FR 6408 (Jan. 30, 2013). 199See § 1026.35(b) and (c). 200The Bureau understands from feedback that 

creditors are concerned about errors in DTI 

calculations and have previously requested that the 

Bureau permit a cure of DTI overages that are 

discovered after consummation. See 79 FR 25730, 

25743–45 (May 6, 2014) (requesting comment on 

potential cure or correction provisions for DTI 

overages). 

in assessing a consumer’s finances and, 

as such, may unduly restrict access to 

credit. Therefore, the proposal noted 

that a potential benefit of a price-based 

General QM loan definition is that a 

mortgage loan’s price reflects credit risk 

based on many factors, including DTI 

ratios, and may be a more holistic 

measure of ability to repay than DTI 

ratios alone. Further, there is inherent 

flexibility for creditors in a rate-spreadbased General QM loan definition, 

which could facilitate innovation in 

underwriting, including the use of 

emerging research into alternative 

mechanisms to assess a consumer’s 

ability to repay. Such innovations 

include certain new uses of cash flow 

data and analytics to underwrite 

mortgage applicants. This emerging 

technology has the potential to 

accurately assess consumers’ ability to 

repay using, for example, bank account 

data that can identify the source and 

frequency of recurring deposits and 

payments and identify remaining 

disposable income. Identifying the 

remaining disposable income could be a 

method of assessing the consumer’s 

residual income and could potentially 

satisfy a requirement to consider either 

DTI or residual income, absent a 

specific DTI limit. 

The proposal also noted that there is 

significant precedent for using the price 

of a mortgage loan to determine whether 

to apply additional consumer 

protections, in recognition of the lower 

risk generally posed by lower-priced 

mortgages. A price-based General QM 

loan definition would be consistent 

with these existing provisions that 

provide greater protections to 

consumers with more expensive loans. 

For example, TILA and Regulation Z use 

a loan’s APR in comparison to APOR 

and as one trigger for heightened 

consumer protections for certain ‘‘highcost mortgages’’ pursuant to HOEPA.196

Loans that meet HOEPA’s high-cost 

trigger are subject to special disclosure 

requirements and restrictions on loan 

terms, and consumers with high-cost 

mortgages have enhanced remedies for 

violations of the law. Further, in 2008, 

the Board exercised its authority under 

HOEPA to require certain consumer 

protections concerning a consumer’s 

ability to repay, prepayment penalties, 

and escrow accounts for taxes and 

insurance for HPMLs, which have APR 

spreads lower than those prescribed for 

high-cost mortgages but that 

nevertheless exceed APOR by a 

specified threshold.197 Although the 

ATR/QM Rule replaced the ability-torepay requirements promulgated 

pursuant to HOEPA and the Board’s 

2008 rule,198 HPMLs remain subject to 

additional requirements related to 

escrow accounts for taxes and 

homeowners insurance and to appraisal 

requirements.199 The proposal also 

noted that the ATR/QM Rule itself 

provides additional protection to QMs 

that are higher-priced covered 

transactions, as defined in 

§ 1026.43(b)(4), in the form of a 

rebuttable presumption of compliance 

with the ATR provisions, instead of a 

conclusive safe harbor. 

Finally, the proposal preliminarily 

concluded that a price-based General 

QM loan definition would provide 

compliance certainty to creditors 

because creditors would be able to 

readily determine whether a loan is a 

General QM. Creditors have experience 

with APR calculations due to the 

existing price-based regulatory 

requirements described above, and for 

various other disclosure and compliance 

reasons under Regulation Z. Creditors 

also have experience determining the 

appropriate APOR for use in calculating 

rate spreads. As such, the proposal 

stated that the approach should provide 

certainty to creditors regarding a loan’s 

status as a QM.200

Although the proposal would have 

required creditors to consider the 

consumer’s DTI ratio or residual 

income, income or assets other than the 

value of the dwelling, and debts, the 

proposal would not have mandated a 

specific DTI limit. The proposal would 

have removed appendix Q and instead 

would have provided creditors 

additional flexibility for defining 

income or assets other than the value of 

the dwelling and debts. The Bureau did 

not propose a single, specific set of 

standards equivalent to appendix Q for 

what must be counted as income or 

assets and what may be counted as 

debts. For purposes of the proposed 

requirement, income or assets and debts 

would be determined in accordance 

with proposed § 1026.43(e)(2)(v)(B), 

which would have required the creditor 

to 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 

proposed rule would have provided a 

safe harbor to creditors using 

verification standards the Bureau 

specifies. The proposal noted that this 

could potentially include relevant 

provisions from Fannie Mae’s Single 

Family Selling Guide, Freddie Mac’s 

Single-Family Seller/Servicer Guide, 

FHA’s Single Family Housing Policy 

Handbook, the VA’s Lenders Handbook, 

and the Field Office Handbook for the 

Direct Single Family Housing Program 

and Handbook for the Single Family 

Guaranteed Loan Program of the USDA, 

current as of the proposal’s public 

release. However, under the proposal, 

creditors would not have been required 

to verify income and debt according to 

the standards the Bureau specifies. 

Rather, the proposal would have 

provided creditors with the flexibility to 

develop other methods of compliance 

with the verification requirements. 


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86326 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

201All estimates in Table 7 included loans that 

meet the Small Creditor QM loan definition in 

§ 1026.43(e)(5). In particular, loans originated by 

small creditors that meet the criteria in 

§ 1026.43(e)(5) are safe harbor QMs if priced below 

3.5 percentage points over APOR or are rebuttable 

presumption QMs if priced 3.5 percentage points or 

more over APOR. The Bureau has provided revised 

analysis in part V.B.5 to reflect a revised 

methodology to identify creditors eligible to 

originate loans as small creditors under 

§ 1026.43(e)(5). 

The proposal would have provided 

that a loan meets the General QM loan 

definition in § 1026.43(e)(2) only if the 

APR exceeds APOR for a comparable 

transaction by less than 2 percentage 

points as of the date the interest rate is 

set. In proposing this threshold, the 

Bureau tentatively concluded that it 

would strike an appropriate balance 

between ensuring that loans receiving 

QM status may be presumed to comply 

with the ATR provisions and ensuring 

that access to responsible, affordable 

mortgage credit remains available to 

consumers. For these same reasons, the 

Bureau proposed higher thresholds for 

smaller loans and subordinate-lien 

transactions, as the Bureau was 

concerned that loans with lower loan 

amounts may be priced higher than 

larger loans, even if the consumers have 

similar credit characteristics and a 

similar ability to repay. For all loans, 

regardless of loan size, the Bureau did 

not propose to alter the current 

threshold separating safe harbor from 

rebuttable presumption QMs in 

§ 1026.43(b)(4), under which a loan is a 

safe harbor QM if its APR exceeds 

APOR for a comparable transaction by 

less than 1.5 percentage points as of the 

date the interest rate is set (or 3.5 

percentage points for subordinate-lien 

transactions). As such, under the 

proposal, first-lien loans that otherwise 

meet the General QM loan definition 

and for which the APR exceeds APOR 

by 1.5 or more percentage points (but by 

less than 2 percentage points) as of the 

date the interest rate is set would have 

received a rebuttable presumption of 

compliance with the ATR provisions. 

Finally, the proposal provided 

analysis of the potential effects on 

access to credit of a price-based 

approach to defining a General QM. As 

indicated by the various combinations 

in Table 7 below, the proposal analyzed 

2018 HMDA data and found that under 

the current rule—including the 

Temporary GSE QM loan definition, the 

General QM loan definition with a 43 

percent DTI limit, and the Small 

Creditor QM loan definition in 

§ 1026.43(e)(5)—90.6 percent of 

conventional purchase loans were safe 

harbor QMs and 95.8 percent were safe 

harbor QMs or rebuttable presumption 

QMs. Under the proposed General QM 

loan definition’s rate-spread thresholds 

of 1.5 (safe harbor) and 2.0 (rebuttable 

presumption) percentage points over 

APOR, the proposal stated that 91.6 

percent of conventional purchase loans 

would have been safe harbor QMs and 

96.1 percent would have been safe 

harbor QM or rebuttable presumption 

QMs.201 Based on these 2018 data, the 

proposal stated that rate-spread 

thresholds of 1.0–2.0 percentage points 

over APOR for safe harbor QMs would 

have covered 83.3 to 94.1 percent of the 

conventional purchase market (as safe 

harbor QMs), while rate-spread 

thresholds of 1.5–2.5 percentage points 

over APOR for rebuttable presumption 

QMs would have covered 94.3 to 96.8 

percent of the conventional purchase 

market (as safe harbor and rebuttable 

presumption QMs). As explained 

further in part V.B.5, the Bureau is 

providing in Table 7A revised estimates 

for the size of the QM market based on 

the higher thresholds for small loans 

and manufactured housing loans as 

adopted by this final rule and also to 

reflect a revised methodology to identify 

creditors eligible to originate loans as 

small creditors under § 1026.43(e)(5). 

TABLE 7—PROPOSAL’S ESTIMATED SHARE OF 2018 CONVENTIONAL FIRST-LIEN PURCHASE LOANS WITHIN VARIOUS

PRICE-BASED SAFE HARBOR (SH) QM AND REBUTTABLE PRESUMPTION (RP) QM DEFINITIONS

[HMDA data] 

Approach 

Safe harbor QM 

(share of 

conventional 

purchase market) 

QM overall 

(share of 

conventional 

purchase market) 

Temporary GSE QM + DTI 43 .................................................................................................................... 90.6 95.8 

Proposal (SH 1.50, RP 2.00) ....................................................................................................................... 91.6 96.1 

SH 0.75, RP 1.50 ........................................................................................................................................ 74.6 94.3 

SH 1.00, RP 1.50 ........................................................................................................................................ 83.3 94.3 

SH 1.25, RP 1.75 ........................................................................................................................................ 88.4 95.3 

SH 1.35, RP 2.00 ........................................................................................................................................ 89.8 96.1 

SH 1.40, RP 2.00 ........................................................................................................................................ 90.5 96.1 

SH 1.75, RP 2.25 ........................................................................................................................................ 93.1 96.6 

SH 2.00, RP 2.50 ........................................................................................................................................ 94.1 96.8 

Despite the expected benefits of a 

price-based General QM loan definition, 

the proposal noted concerns about the 

definition. In particular, the Bureau 

acknowledged that while the Bureau 

believes a loan’s price may be a more 

holistic and flexible measure of a 

consumer’s ability to repay than DTI 

alone, the Bureau recognized that there 

is a distinction between credit risk, 

which largely determines pricing 

relative to the prime rate, and a 

particular consumer’s ability to repay, 

which is one component of credit risk. 

The Bureau also acknowledged that 

factors unrelated to the individual loan 

(e.g., institutional factors such as the 

competing policy considerations 

inherent in setting guarantee fees on 

GSE loans) can influence its price and 

that a price-based approach would 

incentivize some creditors to price some 

loans just below the threshold so that 

the loans will receive the presumption 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86327 

202 85 FR 41716, 41736–37 (July 10, 2020). 

203 Id. at 41737. See also 78 FR 6408, 6534 (Jan. 

13, 2013) (stating that the Bureau believed it was 

appropriate to presume that loans that are eligible 

to be purchased or guaranteed by the GSEs ‘‘while 

under conservatorship’’ have been originated with 

appropriate consideration of consumers’ ability to 

repay ‘‘in light of this significant Federal role and 

the government’s focus on affordability in the wake 

of the mortgage crisis’’). 

204The Bureau acknowledged that some loans 

currently originated as Temporary GSE QMs have 

higher DTI ratios. However, the proposal expressed 

concern about adopting a DTI limit above a range 

of 45 to 48 percent without a requirement to 

consider compensating factors. 

of compliance that comes with QM 

status. The proposal also acknowledged 

concerns about the sensitivity of a pricebased General QM loan definition to 

macroeconomic cycles and that a pricebased approach would likely be procyclical, with a more expansive QM 

market when the economy is expanding, 

and a more restrictive QM market when 

credit is tight. The Bureau discusses 

these concerns below in part V.B.5. 

As noted above, stakeholders 

providing feedback prior to the General 

QM Proposal suggested a range of 

options the Bureau should consider to 

replace the 43 percent DTI limit in the 

General QM loan definition. These 

options are discussed at length in the 

proposal.202 The Bureau considered 

these options in developing the 

proposal, but preliminarily concluded 

that the price-based approach in 

proposed § 1026.43(e)(2) would best 

achieve the statutory goals of ensuring 

consumers’ ability to repay and 

maintaining access to responsible, 

affordable, mortgage credit. However, as 

explained in part V.B.3, below, the 

Bureau requested comment on whether 

an alternative approach that adopts a 

higher DTI limit or a hybrid approach 

that combines pricing and a DTI limit, 

along with a more flexible standard for 

defining income or assets and debts, 

could provide a superior alternative to 

the price-based approach. 

The proposal also acknowledged that 

some stakeholders requested that the 

Bureau make the Temporary GSE QM 

loan definition permanent. The Bureau 

did not propose this alternative because 

of its concern that there is not a basis 

to presume for an indefinite period that 

loans eligible to be purchased or 

guaranteed by the GSEs—whether or not 

the GSEs are under conservatorship— 

have been originated with appropriate 

consideration of consumers’ ability to 

repay.203 The Bureau also expressed 

concern that making the Temporary GSE 

QM loan definition permanent could 

stifle innovation and competition in 

private-sector approaches to 

underwriting. The Bureau also 

expressed concern that, as long as the 

Temporary GSE QM loan definition 

continues in effect, the non-GSE private 

market is less likely to rebound and that 

the existence of the Temporary GSE QM 

loan definition may be contributing to 

the limited non-GSE private market. As 

explained above, the Extension Final 

Rule extended the Temporary GSE QM 

loan definition to expire on the 

mandatory compliance date of this final 

rule or when GSE conservatorship ends. 

3. Alternative to the Proposed PriceBased General QM Loan Definition: 

Retaining a DTI Limit 

Although the Bureau proposed to 

remove the 43 percent DTI limit and 

adopt a price-based approach for the 

General QM loan definition, the Bureau 

requested comment on an alternative 

approach that would retain a DTI limit, 

but raise it above the current limit of 43 

percent, and provide a more flexible set 

of standards for verifying income or 

assets and debts in place of appendix Q. 

The Bureau requested comment on this 

alternative proposal because of concerns 

about the price-based approach. In 

particular, the Bureau acknowledged the 

sensitivity of a price-based QM 

definition to macroeconomic cycles, 

including concerns that the price-based 

approach could be pro-cyclical, with a 

more expansive QM market when the 

economy is expanding, and a more 

restrictive QM market when credit is 

tight. The Bureau was especially 

concerned about these potential effects 

given the recent economic disruptions 

associated with the COVID–19 

pandemic. The Bureau also 

acknowledged that a small share of 

loans that satisfy the current General 

QM loan definition would lose QM 

status under the proposed price-based 

approach due to the loans’ rate spread 

exceeding the applicable threshold. 

Further, and as described above, the 

Bureau analyzed the relationship 

between DTI ratios and early 

delinquency, using data on first-lien 

conventional purchase originations from 

the NMDB, including a matched sample 

of NMDB and HMDA loans. That 

analysis, as shown in Tables 3 and 4 

above, shows that early delinquency 

rates increase consistently with DTI 

ratio. For these reasons, the Bureau 

requested comment on whether an 

approach that increases the DTI limit to 

a specific threshold within a range of 45 

to 48 percent and that includes more 

flexible definitions of debt and income 

would be a superior alternative to a 

price-based approach.204

The Bureau also analyzed the 

potential effects of a DTI-based 

approach on the size of the QM market 

and on access to credit. As indicated in 

the proposal’s Table 8, the proposal 

found that 2018 HMDA data show that 

with the Temporary GSE QM loan 

definition and the General QM loan 

definition with a 43 percent DTI limit, 

90.6 percent of conventional purchase 

loans were safe harbor QMs and 95.8 

percent were safe harbor QM or 

rebuttable presumption QMs. If, instead, 

the Temporary GSE QM loan definition 

were not in place along with the General 

QM loan definition (with the 43 percent 

DTI limit), and assuming no change in 

consumer or creditor behavior from the 

2018 HMDA data, then the proposal 

found that only 69.3 percent of loans 

would have been safe harbor QMs and 

73.6 percent of loans would have been 

safe harbor QMs or rebuttable 

presumption QMs. The proposal also 

noted that raising the DTI limit above 43 

percent would increase the size of the 

QM market and, as a result, potentially 

increase access to credit relative to the 

General QM loan definition with a DTI 

limit of 43 percent. The proposal noted 

that the magnitude of the increase in the 

size of the QM market and potential 

increase in access to credit would 

depend on the selected DTI limit. A DTI 

limit in the range of 45 to 48 percent 

would likely result in a QM market that 

is larger than one with a DTI limit of 43 

percent but smaller than the status quo 

(i.e., Temporary GSE QM loan definition 

and DTI limit of 43 percent). However, 

the proposal noted the Bureau’s 

expectation that consumers and 

creditors would respond to changes in 

the General QM loan definition, 

potentially allowing additional loans to 

be made as safe harbor QMs or 

rebuttable presumption QMs. As 

explained further in part V.B.5, the 

Bureau is providing in Table 8A revised 

analysis of the size of the QM market to 

reflect a revised methodology to identify 

creditors eligible to originate loans as 

small creditors under § 1026.43(e)(5). 


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TABLE 8—PROPOSAL’S ESTIMATED SHARE OF 2018 CONVENTIONAL PURCHASE LOANS WITHIN VARIOUS SAFE HARBOR

QM AND REBUTTABLE PRESUMPTION QM DEFINITIONS

[HMDA data] 

Approach 

Safe harbor QM 

(share of 

conventional 

market) 

QM overall 

(share of 

conventional 

market) 

Temporary GSE QM + DTI 43 .................................................................................................................... 90.6 95.8 

Proposal (Pricing at 2.0) .............................................................................................................................. 91.6 96.1 

DTI limit 43 .................................................................................................................................................. 69.3 73.6 

DTI limit 45 .................................................................................................................................................. 76.1 80.9 

DTI limit 46 .................................................................................................................................................. 78.8 83.8 

DTI limit 47 .................................................................................................................................................. 81.4 86.6 

DTI limit 48 .................................................................................................................................................. 84.1 89.4 

DTI limit 49 .................................................................................................................................................. 87.0 92.4 

DTI limit 50 .................................................................................................................................................. 90.8 96.4 

The Bureau specifically requested 

comment on a specific DTI limit 

between 45 and 48 percent. The Bureau 

requested comment and data on 

whether increasing the DTI limit to a 

specific percentage between 45 and 48 

percent would be a superior alternative 

to the proposed price-based approach, 

and, if so, on what specific DTI 

percentage the Bureau should include in 

the General QM loan definition. The 

Bureau requested comment and data as 

to how specific DTI percentages would 

be expected to affect access to credit and 

would be expected to affect the risk that 

the General QM loan definition would 

include loans that should not receive a 

presumption of compliance with TILA’s 

ATR requirements. The Bureau also 

requested comment on whether 

increasing the DTI limit to a specific 

percentage between 45 to 48 percent 

would better balance the goals of 

ensuring access to responsible, 

affordable credit and ensuring that QM 

status is limited to loans for which it is 

appropriate to presume that consumers 

have the ability to repay. The Bureau 

also requested comment on the 

macroeconomic effects of a DTI-based 

approach, as well as whether and how 

the Bureau should weigh such effects in 

amending the General QM loan 

definition. In addition, the Bureau 

requested comment on whether, if the 

Bureau adopts a higher specific DTI 

limit as part of the General QM loan 

definition, the Bureau should retain the 

price-based threshold of 1.5 percentage 

points over APOR to separate safe 

harbor QMs from rebuttable 

presumption QMs for first-lien 

transactions. 

The Bureau also requested comment 

on whether to adopt a hybrid approach 

in which a combination of a DTI limit 

and a price-based threshold would be 

used in the General QM loan definition. 

The proposal noted that one such 

approach could impose a DTI limit only 

for loans above a certain pricing 

threshold. Such an approach would be 

intended to reduce the likelihood that 

loans for which the consumer lacks 

ability to repay would receive a 

presumption of compliance with the 

ATR requirements, while avoiding the 

potential burden and complexity of a 

DTI limit for many lower-priced loans. 

The proposal explained that a similar 

approach might impose a DTI limit 

above a certain pricing threshold and 

also tailor the presumption of 

compliance with the ATR requirements 

based on DTI. For example, the proposal 

noted that the rule could provide that 

(1) for loans with rate spreads under 1 

percentage point, the loan is a safe 

harbor QM regardless of the consumer’s 

DTI ratio; (2) for loans with rate spreads 

at or above 1 but less than 1.5 

percentage points, a loan is a safe harbor 

QM if the consumer’s DTI ratio does not 

exceed 50 percent and a rebuttable 

presumption QM if the consumer’s DTI 

is above 50 percent; and (3) if the rate 

spread is at or above 1.5 but less than 

2 percentage points, the loan would be 

rebuttable presumption QM if the 

consumer’s DTI ratio does not exceed 50 

percent and a non-QM loan if the DTI 

ratio is above 50 percent. 

The proposal explained another 

hybrid approach that would impose a 

DTI limit on all General QMs but would 

allow higher DTI ratios for loans below 

a set pricing threshold. For example, the 

rule could generally impose a DTI limit 

of 47 percent but could permit a loan 

with a DTI ratio up to 50 percent to be 

eligible for QM status under the General 

QM loan definition if the APR is less 

than 2 percentage points over APOR. 

This approach might limit the 

likelihood of providing QM status to 

loans for which the consumer lacks 

ability to repay, but also would permit 

some lower-priced loans with higher 

DTI ratios to achieve QM status. 

With respect to the Bureau’s concerns 

about appendix Q, the Bureau requested 

comment on an alternative method of 

defining debt and income to replace 

appendix Q in conjunction with a 

specific DTI limit. The Bureau 

expressed concern that the appendix Q 

definitions of debt and income are rigid 

and difficult to apply and do not 

provide the level of compliance 

certainty that the Bureau anticipated at 

the time of the January 2013 Final Rule. 

The proposal further noted that, under 

the current rule, some loans that would 

otherwise have DTI ratios below 43 

percent do not satisfy the General QM 

loan definition because their method of 

documenting and verifying income or 

debt is incompatible with appendix Q. 

In particular, the Bureau requested 

comment on whether the approach in 

proposed § 1026.43(e)(2)(v) could be 

applied with a General QM loan 

definition that includes a specific DTI 

limit. As discussed in more detail in the 

section-by-section discussion of 

§ 1026.43(e)(2)(v), proposed 

§ 1026.43(e)(2)(v)(A) would have 

required creditors to 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. 

Proposed § 1026.43(e)(2)(v)(B) and the 

associated commentary would have 

explained how creditors must verify and 

count 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, relying on 

the standards set forth in the ATR 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86329 

requirements in § 1026.43(c). Proposed 

§ 1026.43(e)(2)(v)(B) would have further 

provided creditors a safe harbor with 

standards the Bureau may specify for 

verifying debt and income, potentially 

including relevant provisions from the 

Fannie Mae Single Family Selling 

Guide, the Freddie Mac Single-Family 

Seller/Servicer Guide, FHA’s Single 

Family Housing Policy Handbook, the 

VA’s Lenders Handbook, and USDA’s 

Field Office Handbook for the Direct 

Single Family Housing Program and 

Handbook for the Single Family 

Guaranteed Loan Program, current as of 

the proposal’s public release. The 

Bureau also requested comments on 

potentially adding to the safe harbor 

other standards that external 

stakeholders develop. 

The Bureau requested comment on 

whether the alternative method of 

defining debt and income in proposed 

§ 1026.43(e)(2)(v)(B) could replace 

appendix Q in conjunction with a 

specific DTI limit. As noted above, the 

proposal expressed concern that this 

approach, which combines a general 

standard with safe harbors, may not be 

appropriate for a General QM loan 

definition with a specific DTI limit. The 

Bureau requested comment on whether 

the approach in proposed 

§ 1026.43(e)(2)(v)(B) would address the 

problems associated with appendix Q 

and would provide an alternative 

method of defining debt and income 

that would be workable with a specific 

DTI limit. The Bureau requested 

comment on whether allowing creditors 

to use standards the Bureau may specify 

to verify debt and income—as would be 

permitted under proposed 

§ 1026.43(e)(2)(v)(B)—as well as 

potentially other standards external 

stakeholders develop and the Bureau 

adopts, would provide adequate clarity 

and flexibility while also ensuring that 

DTI calculations across creditors and 

consumers are sufficiently consistent to 

provide meaningful comparison of a 

consumer’s calculated DTI ratio to any 

DTI ratio threshold specified in the rule. 

The Bureau also requested comment 

on what changes, if any, would need to 

be made to proposed 

§ 1026.43(e)(2)(v)(B) to accommodate a 

specific DTI limit. For example, the 

Bureau requested comment on whether 

creditors that comply with manuals that 

have been revised but are substantially 

similar to the manuals specified above 

should receive a safe harbor, as the 

Bureau proposed. The Bureau also 

requested comment on its proposal to 

allow creditors to ‘‘mix and match’’ 

verification standards, including 

whether the Bureau should instead limit 

or prohibit such ‘‘mixing and matching’’ 

under an approach that incorporates a 

specific DTI limit. The Bureau requested 

comment on whether these aspects of 

the approach in proposed 

§ 1026.43(e)(2)(v)(B), if used in 

conjunction with a specific DTI limit, 

would provide sufficient certainty to 

creditors, investors, and assignees 

regarding a loan’s QM status and 

whether it would result in potentially 

inconsistent application of the General 

QM loan definition. 

4. Comments on the Price-Based General 

QM Loan Definition 

Numerous commenters supported the 

Bureau’s proposal to move from a DTIbased General QM loan definition to one 

based on pricing. Commenters that 

supported the proposal included 

industry commenters, consumer 

advocate commenters, a research center 

commenter, joint industry and 

consumer advocate commenters, and 

two GSE commenters. Commenters who 

supported the proposed price-based 

approach generally supported the 

Bureau’s rationale for the proposal, 

described in part V.B.2 above. With 

respect to measuring consumers’ ability 

to repay, commenters supporting the 

proposal generally agreed with the 

Bureau’s analysis showing that the price 

of a loan is strongly associated with its 

performance, measured by whether a 

consumer was 60 days or more past due 

during the first two years of the loan, 

and also agreed that price is a strong 

indicator of consumers’ ability to repay. 

A joint consumer advocate and 

industry comment letter generally 

supporting the proposal described its 

analysis of the relationship between 

delinquency rates and rate spread. The 

commenter’s analysis used Fannie Mae 

Single-Family Loan Performance data 

and, like the Bureau’s 2002–2008 

delinquency analysis, approximated rate 

spreads using the sum of the mortgage 

interest rate and an estimated PMI 

premium, minus APOR. Unlike the 

Bureau’s analysis, however, the 

commenter used a risk-based estimated 

PMI premium to approximate current 

PMI pricing practices. The commenter 

noted that using risk-based PMI pricing 

increases the variance of rate spread 

estimates for loans with PMI, such that 

low-risk consumers have lower 

premiums and high-risk borrowers have 

higher premiums. Like the Bureau’s 

delinquency analysis, the joint 

commenter defined early delinquency 

as whether the consumer was ever 60 

days delinquent during the first two 

years of the loan. The joint commenter’s 

analysis looks at loans by rate spread, 

ranging from less than a 0.5 percentage 

point rate spread, up to 3.0 or more 

percentage points, in increments of 0.5 

percentage points. The commenter 

provided results of this analysis for 

loans originated between 1999–2019, 

and also provided results for loans 

originated between 2013–2018. For both 

sets of loans, the analysis shows early 

delinquency rates rising with rate 

spread. For the 1999–2019 dataset, loans 

with rate spreads of less than 0.5 

percentage points had an early 

delinquency rate of 1.0 percent, rising to 

14.3 percent for rate spreads of 3 

percentage points or more. For the 

2013–2018 dataset, loans with rate 

spreads of less than 0.5 percentage 

points had an early delinquency rate of 

0.5 percent, rising to 10.5 percent for 

rate spreads of 3 percentage points or 

more. 

Similarly, a research center 

commenter generally supporting the 

proposal also provided analysis of loan 

performance by rate spread. The 

commenter looked at Fannie Mae 

Single-Family Loan Performance data 

and portfolio loans and loans in PLS 

channels in the Black Knight McDash 

database. The commenter measured 

loan performance by whether the 

consumer was ever 60 days or more 

delinquent, rather than by whether the 

consumer was 60 days or more 

delinquent in the first two years of the 

loan as in the Bureau’s delinquency 

analysis. The commenter stated that its 

measure is more conservative in that it 

produces higher default rates. The 

commenter noted that its analysis found 

all measures of default to be highly 

correlated with rate spreads but also 

noted that defaults on loans originated 

after the financial crisis (defined by the 

commenter as 2013 to 2018 originations) 

are lower than for any other period in 

recent history. The commenter 

attributes this to improvements in 

mortgage underwriting. This 

commenter’s analysis is discussed 

further below in the section-by-section 

analysis of § 1026.43(e)(2)(vi). 

Some commenters supporting the 

proposal, including a research center 

and a joint consumer advocate and 

industry comment, argued that pricing 

is a stronger predictor of default than 

DTI. The joint consumer advocate and 

industry commenter noted that DTI is a 

particularly weak predictor of loan 

performance for near-prime loans. In 

support of that assertion, the commenter 

cited analysis finding that, for a 

thousand consumers with DTI ratios 

between 45 and 50 percent, only two 

additional consumers default compared 

to consumers with DTI ratios between 

40 and 45 percent. That commenter also 

cited analysis showing that, for each 

year since 2011, the 90-day delinquency 


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86330 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

205Robert Bartlett et al., Haas School of Business 

UC Berkeley, Consumer Lending Discrimination in 

the FinTech Era (2019), https://

faculty.haas.berkeley.edu/morse/research/papers/ 

discrim.pdf. 

rate for loans with DTI ratios over 45 

percent is less than that for loans with 

DTI ratios between 30 percent and 45 

percent. The commenter asserts that this 

is counterintuitive to the idea that 

higher DTI ratios are a sound predictor 

of default. 

Some commenters supporting the 

proposed price-based approach, 

including several industry commenters, 

specifically agreed with the Bureau’s 

observation that pricing is a more 

holistic measure of a consumer’s 

financial capacity than DTI alone. 

Generally, these commenters agreed 

with the Bureau’s observation that 

pricing considers a broader set of 

factors, which results in a strong 

measure of ability to repay that is more 

complete than a DTI-based definition. A 

joint consumer advocate and industry 

commenter asserted that a DTI limit 

would curtail access to credit for 

creditworthy consumers, such as those 

who have demonstrated the ability to 

handle debt by regularly paying rent or 

who have compensating factors 

permitting them to exceed a particular 

DTI cutoff. That commenter also 

asserted that there are considerable 

challenges to the measurement of DTI, 

especially the income component, 

which are accentuated for nontraditional and non-salary employees, 

including many entrepreneurs and gig 

workers. 

Commenters supporting the pricebased approach, including a GSE 

commenter, also agreed with the 

Bureau’s assertion that the price-based 

approach would maintain access to 

responsible, affordable mortgage credit 

after the expiration of the Temporary 

GSE QM loan definition. A research 

center commenter estimated the overall 

effect of the proposed changes on QM 

lending volumes using 2019 HMDA data 

to determine the number of loans that 

would not have been QMs in 2019 

under the current rule but would be 

QMs under the proposal (using the 

General QM pricing thresholds in the 

proposal). The commenter found that 

there were 346,376 such loans that 

would have gained QM status under the 

proposal. The commenter further found 

that 49,200 loans would have been QMs 

in 2019 under the current rule but 

would be non-QM loans under the 

proposal (i.e., loans with DTI ratios of 

43 percent or lower, but with pricing 

that exceeded the proposed rate-spread 

thresholds), resulting in a gain of 

approximately 297,000 QMs under the 

proposed thresholds. The commenter 

asserted that, while the creditors of 

these loans gaining QM status would 

receive legal protection due to the loans’ 

QM status, the reduction in litigation 

risk would translate into better pricing 

for the consumer. A joint consumer 

advocate and industry commenter 

expressed concern about access to credit 

under a DTI-based approach, noting that 

‘‘higher DTI’’ consumers above the 

threshold would likely pay substantially 

higher interest rates on potentially 

riskier products or may be unable to 

obtain financing. In support of that 

assertion, the commenter cited the 

Assessment Report findings that 

applicants for jumbo loans with DTI 

ratios above 43 percent (who were 

therefore ineligible for QMs under the 

General QM loan definition or the 

Temporary GSE QM loan definition) 

paid significantly higher interest rates 

and had reduced access to credit. The 

commenter further expressed concern 

that such effects would 

disproportionately affect low-income 

and low-wealth families, including 

families of color. 

As compared to a DTI-based 

approach, some commenters indicated 

that the price-based approach would 

expand access to credit for certain 

underserved market segments, such as 

low-income and minority consumers. 

Conversely, some commenters, 

including a consumer advocate 

commenter, expressed concern that a 

price-based General QM loan definition 

would curtail access to credit to lowincome and minority consumers. A 

research center commenter that 

supported the price-based approach also 

acknowledged that minority consumers 

are more likely to have higher rate 

spreads. This commenter stated that, for 

GSE loans, 6.2 percent and 5.0 percent 

of all purchase lending to Black and 

Hispanic households, respectively, had 

rate spreads above 1.5 percentage 

points, compared with 2 percent for 

non-Hispanic White households. The 

commenter stated that the disparity was 

wider in the non-GSE conventional 

channel, with 13.4 percent and 17.0 

percent for Black and Hispanic 

households, respectively, compared 

with 5 percent for non-Hispanic White 

households. An industry commenter 

cited a 2019 study that found that, 

compared to similar borrowers, 

Hispanic and African-American 

borrowers are charged rates that are 7.9 

basis points higher for purchase 

transactions and 3.6 basis points higher 

for refinance transactions by creditors 

using algorithmic-based pricing 

systems.205 However, this commenter 

suggested that the Bureau address this 

access-to-credit concern by adjusting the 

rate-spread threshold. As discussed 

below, many commenters supporting 

the proposed price-based approach 

requested that the Bureau increase 

either the proposed safe harbor 

threshold, the threshold separating QMs 

from non-QM loans, or both, to further 

ensure continued access to credit, 

including for minority consumers. A 

consumer advocate commenter also 

cited the 2019 study referenced above. 

Commenters supporting the proposed 

price-based approach also generally 

supported removing the 43 percent DTI 

limit and appendix Q. With respect to 

appendix Q, a consumer advocate 

commenter specifically asserted that, 

even if the Bureau retained and revised 

appendix Q, those revisions would 

quickly become antiquated. Consistent 

with the Bureau’s rationale for the 

proposal, some commenters also cited 

the historical precedent for a pricebased threshold in Regulation Z, 

including the existing QM safe harbor 

threshold. Some commenters noted that 

a price-based approach would be simple 

to implement because rate spreads are 

already required to be calculated for 

other regulatory purposes. 

Although many commenters 

supported the overall shift from a DTIbased General QM loan definition to one 

based on pricing, numerous commenters 

opposed the price-based approach. 

These commenters include individual 

commenters, an academic commenter, a 

research center commenter, industry 

commenters, and some consumer 

advocate commenters. Some 

commenters asserted that a loan’s price 

is not an adequate indicator of a 

consumer’s ability to repay. For 

example, some commenters that 

opposed the price-based approach 

argued that creditors do not necessarily 

consider individual ability-to-repay 

factors in deciding on the price of loans 

they offer to the consumer, that price 

may vary across creditors for reasons 

unrelated to the consumer, and that the 

price-based approach may favor some 

creditors or business models over 

others. Some commenters critical of the 

proposal noted that a loan’s price is set 

by reference to factors that are not 

specific to the consumer, in some 

instances including prohibited factors 

such as race, and therefore is an 

inappropriate basis for the General QM 

loan definition. Similarly, some 

commenters argued that price is an 

inadequate indicator of a consumer’s 

ability to repay because price is based 

on credit risk (i.e., risk of loss to the 

creditor or investor) rather than risk to 

the consumer. Some commenters 


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206See supra note 194. 

207Among other things, the commenter cited a 

recent Experian consumer ‘‘payment hierarchy’’ 

study, which used samples of consumers at various 

points in time and with various combinations of 

credit obligations and observed the relative 

performance of the credit obligations for two years. 

The commenter pointed out that, with respect to the 

consumers observed from February 2018 to 

February 2020—the most recent cohort in the 

study—Experian found that among those consumers 

with a mortgage, auto loan, retail card, and general 

purpose credit card, 0.81 percent became 90 days 

delinquent on their mortgage, whereas 4.26 percent 

became 90 days delinquent on their bank card. The 

disparities were roughly the same for consumers 

with a mortgage, bank card, and personal loan. See 

Experian, Consumer payment hierarchy by trade 

type: Time-series analysis (July 2020), http://

images.go.experian.com/Web/ExperianInformation

SolutionsInc/%7Ba6ad2c78-e1da-46eb-b97bbf2d953ce38d%7D_Payment_Hierarchy_Report.pdf. 

The commenter stated that this suggests that 

originating a mortgage where the consumer lacks a 

reasonable ability to repay may manifest in 

delinquencies on credit obligations other than the 

mortgage itself. 

208The commenter collectively referred to 

homeowners associations, condominium 

associations, and housing cooperatives as 

‘‘community associations.’’ 

asserted that creditors do not price risk 

accurately, with some commenters 

citing the experience of loans made 

prior to the financial crisis as support 

for this concern. Some commenters, 

including a research center commenter, 

asserted that creditors would use the 

price-based approach to manipulate 

APOR or adjust their prices to fit just 

under the rate-spread thresholds. 

A consumer advocate commenter 

argued that LTV ratios, which may be 

one component of pricing, cannot form 

the basis of the QM definition. This 

commenter cited TILA section 

129C(a)(3), which provides that the 

consumer’s equity in the dwelling or 

real property that secures repayment of 

the loan cannot be considered as a 

financial resource of the borrower in 

determining a consumer’s ability to 

repay. The commenter argued that, by 

extension, LTV ratios also cannot legally 

form any part of the basis of the QM 

definition. That commenter further 

asserted that creditors’ reliance on LTV 

ratios in setting price does not reflect 

consumers’ ability to repay because (1) 

consumers with substantial equity are 

likely to pay their mortgage regardless of 

the impact it may have on their overall 

finances; (2) consumers with substantial 

equity may have the option to refinance 

or sell their home and are therefore 

unlikely to default and allow their home 

to go into foreclosure; and (3) even if a 

consumer with substantial equity does 

go into foreclosure, the lower the LTV 

ratio, the more likely the creditor will be 

able to recover the unpaid principal 

balance from sale proceeds. The 

commenter contends that because 

pricing a loan involves consideration of 

the consumer’s equity, a price-based 

approach to defining QM is 

impermissible. 

One research center commenter 

asserted that the price-based approach 

does not capture risk accurately and 

criticized the Bureau’s delinquency 

analysis, which focuses on average early 

delinquency rates by rate spread and 

DTI bins. That commenter analyzed 

2018 HMDA data, which is described in 

the Bureau’s Tables 2 and 4 provided in 

the proposal and above, and servicer 

data from CoreLogic’s Loan Level 

Markets Analytics dataset through 2019, 

using a risk assessment matrix 

developed by the commenter that 

combines LTV ratios, DTI ratios, and 

credit scores. The commenter’s analysis 

replicated the Bureau’s definition of 

early delinquency of 60 days past due 

during the first two years of the loan. 

The commenter found that, for loans 

with identical rate spreads, early 

delinquency rates vary with other 

characteristics like LTV ratios, DTI 

ratios, and credit scores. Similarly, for 

loans with similar risk levels based on 

the commenters’ risk assessment matrix, 

the rate spreads vary greatly. The 

commenter asserts that this is evidence 

that price does not capture risk 

accurately. The commenter further 

argued that the price-based approach is 

less accurate in predicting the 

likelihood of default for higher-risk 

loans. The commenter asserted that 

some higher-risk loans may be crosssubsidized, and further noted that 

pricing can be influenced by whether 

the consumer shopped for a loan and by 

‘‘random luck.’’ Analyzing Optimal Blue 

rate data from the 2013–2018 timeframe, 

the research center commenter 

contended that the price-based 

approach would have signaled that 

market-wide risk declined, whereas 

other measures, including DTI and other 

industry risk metrics, would have 

signaled the opposite. 

A consumer advocate commenter 

asserted that the price-based approach 

would grant QM status to loans where 

a sizeable percentage of consumers lack 

ability to repay and would create 

heightened risk of foreclosure. The 

commenter cited to the Bureau’s 

delinquency analysis in Table 1 

(provided in the proposal and above) 

that looked at loans originated between 

2002 and 2008 and shows an early 

delinquency rate of 13 percent for loans 

priced between 1.75 and 1.99 

percentage points over APOR. The 

commenter also cited Urban Institute 

analysis of loans from 2001 to 2004 and 

2005 to 2008 and pointed to loans 

priced between 1.51 and 2.0 percentage 

points over APOR having 90-day 

delinquency rates of 20.4 percent and 

29.2 percent, respectively.206 The 

commenter asserted that this undercuts 

the Bureau’s theory that creditors 

accurately assess and price for risk 

throughout the business cycle and 

indicates that the proposal would 

extend a presumption of compliance 

with the ATR provisions to loans that 

are not affordable. 

That consumer advocate commenter 

disagreed with the Bureau’s analysis 

using 60-day delinquency rates during 

the first two years of the loan as a 

measure of ability to repay because the 

commenter asserted that consumers 

tend to forgo other expenses 207 and take 

extreme measures to make timely 

mortgage payments, even if the loan was 

not affordable at consummation. This 

commenter argued that TILA requires 

assessment of a consumer’s ability to 

repay the mortgage and still meet other 

obligations and cover basic living 

expenses. The commenter argued that 

the fact that a consumer was not 60 days 

or more past due on their mortgage does 

not answer the question of whether the 

loan was affordable at consummation. 

The commenter requested that the 

Bureau examine correlations between 

mortgage originations and delinquencies 

on other types of credit obligations that 

are visible in credit reporting data to 

assess the extent to which mortgages at 

various price and DTI levels are 

consistent with an assessment of the 

consumer’s ability to repay. That 

commenter further asserted that default 

has more to do with macroeconomic 

conditions than individual ability to 

repay. 

An industry commenter asserted that 

the Bureau failed to examine the effect 

of a DTI limit on mortgage performance 

by property type. The commenter 

asserted that community association 

housing 208 is unique from other 

housing models in that homeowners are 

required to pay assessments for 

community operations and that 

consumers’ DTI may increase if 

community association costs increase. 

The commenter provided analysis of the 

percentage of loans 180 days delinquent 

by DTI bin, using Fannie Mae 

Condominium Unit Mortgages from 

2002–2008 and 2015–2019. The 

commenter asserted that the analysis 

shows that, within the sample, ‘‘high 

DTI’’ loans have higher 180-day 

delinquency rates and the difference in 

delinquency rate is significant. The 

commenter asserted that this is evidence 

that reasonable DTI requirements are 

important for condominium unit 

mortgages and urged the Bureau to 


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209 15 U.S.C. 1691 et seq. 

210 42 U.S.C. 3601 et seq. 

study the relationship between high DTI 

ratios, property type, and delinquency 

prior to issuing the final rule or to 

expand its analysis to include property 

type as a variable in testing the 

effectiveness of pricing as a measure of 

ability to repay. 

Some commenters, including a 

research center commenter, a consumer 

advocate commenter, and two academic 

commenters, raised concerns that the 

price-based approach would be procyclical. Some commenters that 

criticized the proposal as pro-cyclical 

expressed concern that the price-based 

General QM loan definition could grant 

QM status to loans exceeding 

consumers’ ability to repay during 

periods of economic expansion, lead to 

increased housing prices, and create 

systemic risk. Similarly, some 

commenters that criticized the proposed 

approach expressed concern that 

removing the DTI limit would remove a 

constraint on housing prices. These 

commenters generally asserted that 

increased housing prices could increase 

consumers’ mortgage payments and 

thereby increase the likelihood that 

consumers would be unable to afford 

their loan. These commenters further 

asserted that increased housing prices 

would prevent some consumers from 

obtaining loans altogether. For these 

reasons, these commenters asserted that 

the price-based approach could have a 

negative effect on access to credit for 

some consumers. These commenters 

also asserted that the pro-cyclical nature 

of the price-based approach could 

disproportionately affect underserved 

borrowers, including minority 

consumers. 

An academic commenter expressed 

concern that the Bureau’s delinquency 

analysis does not reflect the full extent 

of rate compression. That commenter 

criticized the Bureau’s delinquency 

analysis of 2002–2008 first-lien 

purchase originations in the NMDB 

(Tables 1, 3, and 5 in the proposal and 

above), asserting that the analysis 

incorrectly assumes that rate spreads 

remained constant during that seven 

year period. The commenter stated that 

the Bureau should analyze rate spreads 

and associated default risk by vintage 

year, citing analysis showing that rate 

spreads fell significantly between 2004 

and 2006 and suggesting that the 

Bureau’s analysis therefore 

underestimates early delinquency rates 

at the height of the subprime mortgage 

boom. The commenter also criticized 

the Bureau’s delinquency analysis of 

2018 HMDA data (Tables 2, 4, and 6 in 

the proposal and above) as not 

informative because they do not cover 

two full years and are not indicative of 

bubble conditions. Another academic 

commenter analyzed a dataset of 

primarily subprime loans that were 

securitized in private-label 

securitizations during the housing 

bubble of the 2000s. The commenter 

stated that, in that dataset, over half of 

the subprime loans made between 2003 

to 2005 had rate spreads that would 

satisfy the proposed rate-spread test for 

QM status. The commenter asserts that 

the data show that pricing as a measure 

of ability to repay fails when there is a 

credit boom due to rate spread 

compression and urged the Bureau to 

retain a DTI limit and consider an LTV 

ratio requirement as well as part of the 

General QM loan definition. 

Other commenters, including 

commenters that supported the 

proposed price-based approach, 

expressed concerns about fluctuations 

in rate spreads over time. An industry 

commenter and a research center 

commenter suggested that the Bureau 

evaluate the rate-spread thresholds 

periodically and on an as-needed basis 

to determine if adjustments to the 

thresholds may be necessary to 

accommodate changing market and 

economic conditions. These 

commenters cited the rapidly changing 

market conditions at the beginning of 

the COVID–19 pandemic as an example 

of why it may be necessary to 

periodically adjust rate spreads. A 

consumer advocate commenter urged 

the Bureau not to adopt a mechanism 

that would allow the Bureau to adjust 

the rate-spread thresholds in emergency 

situations without notice and comment 

rulemaking. 

Some commenters that did not 

support the price-based approach 

argued that the approach would not 

achieve the Bureau’s stated goals of 

maintaining access to responsible, 

affordable mortgage credit. A research 

center commenter cited the January 

2013 Final Rule, including the General 

and Temporary GSE QM loan 

definitions, as pro-cyclically supporting 

the current home price boom by 

providing additional leverage to 

consumers to bid up home prices. The 

commenter stated that this 

disproportionately affects the housing 

markets for low-income households and 

entry-level homes, where the supply is 

the tightest and the increase in leverage 

has been the greatest. The commenter 

disagreed with the Bureau’s assertion 

that a DTI limit would unduly restrict 

access to credit, as the commenter 

asserts that a DTI limit would provide 

friction during a housing boom, which 

would reduce demand and slow house 

price appreciation. The commenter 

stated that the proposed price-based 

approach would not achieve the 

Bureau’s goal of expanding access to 

credit because it would be even more 

pro-cyclical, resulting in higher house 

price appreciation. The commenter 

asserted that the proposed price-based 

approach does not provide any friction 

to slow house price appreciation and 

would boost demand more than the 

current rule, including the Temporary 

GSE QM loan definition. The 

commenter stated that the average rate 

spread for 2018 GSE purchase loans was 

0.51 basis points, and asserted that 

creditors can therefore loosen lending 

standards and increase rate spreads over 

the foreseeable future with the resulting 

loans remaining below the 1.5 

percentage point safe harbor threshold. 

The commenter also noted concern that 

the proposal would lower the QM 

standard and fuel higher risk leverage. 

Some commenters specifically 

expressed concerns that the proposed 

rule would disproportionately harm 

minority consumers. For example, one 

commenter asserted that by replacing 

the DTI requirement with a pricing 

threshold, the proposed rule would 

subject higher percentages of Black or 

Hispanic borrowers to higher default 

rates. Another commenter stated that 

the proposal would burden borrowers of 

color with higher mortgage costs 

without underwriting and repayment 

ability assessment protections. Some 

commenters suggested that the proposed 

rule is fundamentally flawed because it 

may subject minority borrowers to 

higher prices that are unrelated to their 

actual risk due to ongoing 

discrimination in the market. 

Commenters urged the Bureau to assess 

and empirically evaluate the extent to 

which there is fair lending risk created 

by and embedded in its proposed 

pricing thresholds for QMs before 

adopting any final rule. One commenter 

suggested the Bureau disaggregate its 

analysis to assess the extent to which, 

at any given price band (and especially 

at the margins), early delinquency rates 

are consistent for non-Hispanic White, 

Black, and Hispanic consumers. 

Some commenters (including industry 

commenters, consumer advocate 

commenters, and two joint industry and 

consumer advocate commenters that 

supported the proposed price-based 

approach) expressed concern about the 

connection between the price-based 

General QM loan definition and fair 

lending laws, including the Equal Credit 

Opportunity Act 209 (ECOA) and the Fair 

Housing Act.210 These commenters 

stated that pricing discrimination 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86333 

contravenes the underlying tenet of the 

General QM Proposal that if a consumer 

is purely priced on the true level of risk 

and ability to repay, the rate charged to 

the consumer is an indicator of risk—in 

the event of discriminatory pricing on a 

prohibited basis, the rate charged to the 

consumer is not a true indicator of risk. 

The commenters urged the Bureau to (1) 

make clear that it will not tolerate 

pricing discrimination or other forms of 

bias in the lending process and (2) limit 

the ability of a financial institution to 

receive the QM safe harbor in instances 

where pricing discrimination has 

occurred. Some of these commenters 

asked the Bureau to articulate explicitly 

that the designation of a loan as a QM 

does not signify compliance with the 

Fair Housing Act, ECOA, or any other 

anti-discrimination law pertaining to 

mortgage lending. Other commenters 

further requested that the rule 

specifically condition a General QM’s 

safe harbor status on compliance with 

ECOA. These commenters requested 

that the rule provide that a loan loses its 

QM safe harbor status if there is a 

confirmed instance of discriminatory 

pricing on a prohibited basis that is not 

self-reported and remedied by the 

creditor. 

A research center commenter, as well 

as an individual commenter, argued that 

the proposed approach would 

disproportionately affect minority 

consumers, which the commenters 

asserted would be a violation of the Fair 

Housing Act. In particular, the 

commenters described analysis 

indicating that increased housing prices 

that occur during periods of economic 

expansion (which the commenters 

asserted would be exacerbated as a 

result of the price-based General QM 

loan definition) occur predominately in 

areas with lower-income consumers, 

with higher concentrations of minority 

consumers. The commenters further 

asserted that the price-based approach 

would stimulate greater availability of 

credit which, combined with increased 

home prices, would expose low-income 

households, especially minority 

consumers, to heightened risk of default 

through higher mortgage payments. The 

commenters asked the Bureau to 

implement a multi-factor approach that 

combines DTI ratio, LTV ratio, and 

credit score as the key regulatory 

component of the General QM loan 

definition. The commenters argued that 

this approach would narrow the 

differential in delinquency rates 

between Black or Hispanic consumers 

and non-Hispanic White consumers 

when compared to delinquency rates 

under the proposed price-based 

approach. 

Most commenters that did not support 

the proposed price-based approach 

advocated for alternative approaches to 

the General QM loan definition, such as 

retaining a DTI-based definition, a 

hybrid approach based on DTI and 

pricing, or a multi-factor approach. 

Several commenters supported a DTIbased approach rather than an approach 

based on pricing. Some commenters, 

including an academic commenter, 

industry commenters, and consumer 

advocate commenters, asserted that DTI 

is more reflective of a consumer’s ability 

to repay than a loan’s price, which 

includes factors that are not related to 

the specific consumer. For example, an 

academic commenter argued that the 

rule should retain a DTI limit because 

a DTI limit is effective in containing 

default risk. This commenter asserted 

that the Bureau should increase the DTI 

limit above 43 percent, should further 

expand the DTI limit for GSE mortgage 

programs that have an established track 

record of safe loans, and should amend 

appendix Q to provide more flexible 

methods for determining DTI. Other 

commenters advocating for a DTI-based 

approach suggested that the Bureau 

raise the current 43 percent limit. An 

industry commenter advocating for a 

DTI-based approach suggested retaining 

the current 43 percent DTI limit. 

Another industry commenter suggested 

that the Bureau retain a DTI limit for 

General QMs and raise the threshold to 

50 percent with compensating factors, 

such as allowances for lower LTV ratios 

and for verified assets. That commenter 

also suggested that residual income be 

permitted as a compensating factor for 

a high DTI ratio but did not favor 

allowing residual income as a substitute 

for a DTI determination. As described 

above, several commenters advocating 

for the price-based General QM loan 

definition criticized a DTI-based 

General QM loan definition. 

Other commenters advocated for a 

hybrid approach to the General QM loan 

definition. Some commenters, including 

a consumer advocate commenter and 

industry commenters, advocated for an 

approach that would raise the DTI ratio 

limit and also would expand the 

General QM loan definition to include 

loans with higher DTI ratios if the loans 

are below a set pricing threshold. For 

example, an industry commenter 

suggested that the Bureau impose a DTI 

limit of 47 percent but allow a General 

QM to have a DTI ratio of up to 50 

percent if the rate spread is less than 2 

percentage points. Another industry 

commenter suggested a hybrid approach 

that would retain the current DTI-based 

approach for higher-priced loans. 

Commenters advocating for hybrid 

approaches generally asserted that such 

approaches would better balance 

ensuring consumers have the ability to 

repay with ensuring access to 

responsible, affordable mortgage credit 

than a General QM loan definition based 

on pricing alone. An industry 

commenter advocated for an alternative 

method of defining General QMs that 

would use a DTI limit of 45 to 48 

percent, in addition to the price-based 

approach. As noted above, a research 

center commenter suggested the Bureau 

define General QMs by reference to a 

multi-factor approach that combines 

DTI ratio, LTV ratio, and credit score. 

Other commenters argued against 

hybrid approaches, including noting 

concerns about the complexity of such 

approaches and concerns generally 

related to retaining a specific DTI 

component to the rule. 

Commenters also raised issues related 

to the timing of the rulemaking and the 

issuance of the final rule. Some 

consumer advocate commenters and an 

individual commenter requested that 

the Bureau pause the rulemaking in 

light of the COVID–19 pandemic. 

Consumer advocate commenters 

requesting the Bureau pause the 

rulemaking cited the turmoil and 

economic fallout from the pandemic 

and the rising calls for racial justice as 

reasons to pause the rulemaking. The 

individual commenter and consumer 

advocate commenters raising this issue 

suggested that the Bureau focus its 

efforts on assisting homeowners 

struggling due to the pandemic. An 

industry commenter asserted that the 

Bureau should extend the Temporary 

GSE QM loan definition while it 

undertakes a study of alternative 

measures to evaluate consumers’ ability 

to repay, such as residual income or 

cash flow underwriting (e.g., using bank 

account data that can identify the source 

and frequency of recurring deposits and 

payments and identify remaining 

disposable income). 

An academic commenter stated that 

the Bureau should not address the 

Temporary GSE QM loan definition 

until the final resolution of the GSEs’ 

status. That commenter also expressed 

concerns that the elimination of the 

Temporary GSE QM loan definition 

would set off a housing crisis by making 

homeownership unattainable for some 

consumers and risky for others if the 

GSEs respond to the elimination of the 

Temporary GSE QM loan definition by 

retreating from a substantial segment of 

the market. Another industry 

commenter expressed concern about the 

provision of the Temporary GSE QM 


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86334 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

211These thresholds are discussed below in the 

section-by-section analysis of § 1026.43(e)(2)(vi)(B)– 

(F). Final § 1026.43(e)(2)(vi)(B) provides that, for 

first-lien covered transactions with loan amounts 

greater than or equal to $66,156 (indexed for 

inflation) but less than $110,260 (indexed for 

inflation), the APR may not exceed APOR for a 

comparable transaction as of the date the interest 

rate is set by 3.5 or more percentage points. Section 

1026.43(e)(2)(vi)(C) provides that, for first-lien 

covered transactions with loan amounts less than 

$66,156 (indexed for inflation), the APR may not 

exceed APOR for a comparable transaction as of the 

date the interest rate is set by 6.5 or more 

percentage points. Section 1026.43(e)(2)(vi)(E) 

provides that, for subordinate-lien covered 

transactions with loan amounts greater than or 

equal to $66,156 (indexed for inflation), the APR 

may not exceed APOR for a comparable transaction 

as of the date the interest rate is set by 3.5 or more 

percentage points. Section 1026.43(e)(2)(vi)(F) 

provides that, for subordinate-lien covered 

transactions with loan amounts less than $66,156 

(indexed for inflation), the APR may not exceed 

APOR for a comparable transaction as of the date 

the interest rate is set by 6.5 or more percentage 

points. 

212Final § 1026.43(e)(2)(vi)(D) provides that, for 

first-lien covered transactions secured by a 

manufactured home with loan amounts less than 

$110,260 (indexed for inflation), the APR may not 

exceed APOR for a comparable transaction as of the 

date the interest rate is set by 6.5 or more 

percentage points. 

loan definition that provides that the 

definition expires with respect to a GSE 

when that GSE ceases to operate under 

conservatorship. The commenter 

recommended that the Bureau remove 

this conservatorship clause. The 

commenter noted that the status of the 

conservatorships is outside of the 

Bureau’s control and stated that, if one 

or both conservatorships were to end on 

short notice, the sudden expiration of 

the Temporary GSE QM loan definition 

would create uncertainty in the market 

and reduce access to credit. The 

commenter stated that the Bureau 

should clarify in advance of the end of 

conservatorship what steps the Bureau 

would take with respect to the 

Temporary GSE QM loan definition if 

the conservatorships were to end. 

A research center commenter 

suggested that the Bureau consider the 

proposed changes to the QM rule in 

conjunction with the more recent 

Seasoned QM Proposal. The commenter 

suggested that the Bureau should 

consider additional analysis to study the 

interplay between default rates, ratespread thresholds, loan products, and 

seasoning periods. The commenter 

asserted that, to the extent the seasoning 

proposal has implications for the 

General QM loan definition (or vice 

versa), a combined evaluation of both 

proposals would be more accurate than 

assessing the proposals separately. 

The Final Rule 

The Bureau concludes that this final 

rule’s bright-line pricing thresholds best 

balance consumers’ ability to repay with 

ensuring access to responsible, 

affordable mortgage credit. The Bureau 

is amending the General QM loan 

definition because retaining the existing 

43 percent DTI limit would reduce the 

size of the QM market and likely would 

lead to a significant reduction in access 

to responsible, affordable credit when 

the Temporary GSE QM definition 

expires. The Bureau continues to 

believe that General QM status should 

be determined by a simple, bright-line 

rule to provide certainty of QM status, 

and the Bureau concludes that pricing 

achieves this objective. Furthermore, the 

Bureau concludes that pricing, rather 

than a DTI limit, is a more appropriate 

standard for the General QM loan 

definition. While not a direct measure of 

financial capacity, loan pricing is 

strongly correlated with early 

delinquency rates, which the Bureau 

uses as a proxy for repayment ability. 

The Bureau concludes that conditioning 

QM status on a specific DTI limit would 

likely impair access to credit for some 

consumers for whom it is appropriate to 

presume their ability to repay their 

loans at consummation. Although a 

pricing limit that is set too low could 

also have this effect, compared to DTI, 

loan pricing is a more flexible metric 

because it can incorporate other factors 

that may also be relevant to determining 

ability to repay, including credit scores, 

cash reserves, or residual income. The 

Bureau concludes that a price-based 

General QM loan definition is better 

than the alternatives because a loan’s 

price, as measured by comparing a 

loan’s APR to APOR for a comparable 

transaction, is a strong indicator of a 

consumer’s ability to repay and is a 

more holistic and flexible measure of a 

consumer’s ability to repay than DTI 

alone. 

Specifically, the final rule amends 

Regulation Z to remove the current 43 

percent DTI limit and provides that a 

loan would meet the General QM loan 

definition in § 1026.43(e)(2) only if the 

APR exceeds APOR for a comparable 

transaction by less than 2.25 percentage 

points as of the date the interest rate is 

set. As described further below, the 

Bureau is finalizing a threshold of 2.25 

percentage points, an increase from the 

proposed threshold of 2 percentage 

points, because the Bureau concludes 

that, for most first-lien covered 

transactions, a 2.25-percentage-point 

pricing threshold strikes the best 

balance between ensuring consumers’ 

ability to repay and ensuring access to 

responsible, affordable mortgage credit. 

The final rule provides higher 

thresholds for loans with smaller loan 

amounts and for subordinate-lien 

transactions.211 The final rule provides 

an increase from the proposed 

thresholds for some small manufactured 

housing loans to ensure continued 

access to credit.212 The Bureau is 

preserving the current threshold 

separating safe harbor from rebuttable 

presumption QMs, under which a loan 

is a safe harbor QM if its APR exceeds 

APOR for a comparable transaction by 

less than 1.5 percentage points as of the 

date the interest rate is set (or by less 

than 3.5 percentage points for 

subordinate-lien transactions). 

The final rule requires the creditor to 

consider the consumer’s monthly DTI 

ratio or residual income. The final rule 

also requires the creditor to consider 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 

debt obligations, alimony, and child 

support, as described in the section-bysection analysis of § 1026.43(e)(2)(v)(A). 

The final rule removes appendix Q and, 

as described further below in the 

section-by-section analysis of 

§ 1026.43(e)(2)(v)(B), provides creditors 

additional flexibility for defining the 

consumer’s income or assets and debts. 

As discussed below, these amounts 

must be determined in accordance with 

§ 1026.43(e)(2)(v)(B), which requires the 

creditor to 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 final 

rule provides a safe harbor to creditors 

using verification standards the Bureau 

specifies. Under the final rule, this safe 

harbor includes relevant provisions 

from Fannie Mae’s Single Family 

Selling Guide, Freddie Mac’s SingleFamily Seller/Servicer Guide, FHA’s 

Single Family Housing Policy 

Handbook, the VA’s Lenders Handbook, 

and the Field Office Handbook for the 

Direct Single Family Housing Program 

and Handbook for the Single Family 

Guaranteed Loan Program of the USDA, 

current as of the proposal’s public 

release. However, creditors are not 

required to verify income and debt 

according to the standards the Bureau 

specifies. The final rule provides 

creditors with the flexibility to develop 

other methods of compliance with the 

verification requirements. 

Consistent with the proposal, the 

Bureau is not amending the existing 

product-feature and underwriting 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86335 

213 In 2018, FHA’s county-level maximum loan 

limits ranged from $294,515 to $679,650 in the 

continental United States. See U.S. Dep’t of Hous. 

& Urban Dev., FHA Mortgage Limits, https://

entp.hud.gov/idapp/html/hicostlook.cfm (last 

visited Dec. 8, 2020). 

214 84 FR 37155, 37159 (July 31, 2019). 

215See 12 CFR 1026.43(e)(5) (extending QM 

status to certain portfolio loans originated by 

certain small creditors). In addition, section 101 of 

the Economic Growth, Regulatory Relief, and 

Consumer Protection Act, Public Law 115–174, 132 

Stat. 1296 (2018), amended TILA to add a safe 

harbor for small creditor portfolio loans. See 15 

U.S.C. 1639c(b)(2)(F). 

216 84 FR 37155, 37159 (July 31, 2019). 

217 Id. 

218 Id. 

219See Assessment Report, supra note 63, at 10– 

11, 117, 131–47. 

requirements and limits on points and 

fees. The statutory QM protections 

prohibit certain risky loan terms and 

features that could increase the risk that 

loans would be unaffordable and also 

include limited underwriting criteria 

that overlap with some elements of the 

ATR requirements. However, the Bureau 

concludes, as it initially concluded in 

the January 2013 Final Rule, that the 

General QM criteria should include 

additional assurances of a consumer’s 

ability to repay to ensure that loans that 

obtain QM status warrant a presumption 

of compliance with the ATR 

requirements. The Bureau also 

continues to believe that creditors 

should be able to determine whether 

individual mortgage transactions will be 

deemed QMs through a bright-line 

metric. 

In the January 2013 Final Rule, the 

Bureau exercised its authority under 

TILA section 129C(b)(2)(A)(vi) to 

impose a specific DTI limit as part of the 

General QM loan definition. The Bureau 

concludes that retaining the existing 43 

percent DTI limit after the Temporary 

GSE QM loan definition expires would 

significantly reduce the size of the QM 

market and likely would reduce access 

to responsible, affordable mortgage 

credit. For the reasons described in part 

V.B.1, the Bureau believes that many 

loans currently originated under the 

Temporary GSE QM loan definition 

would cost materially more or may not 

be made at all, absent changes to the 

General QM loan definition. In 

particular, based on 2018 data, the 

Bureau estimated in the proposal that, 

as a result of the General QM loan 

definition’s 43 percent DTI limit, 

approximately 957,000 loans—16 

percent of all closed-end first-lien 

residential mortgage originations in 

2018—would be affected by the 

expiration of the Temporary GSE QM 

loan definition. These loans are 

currently originated as QMs due to the 

Temporary GSE QM loan definition but 

would not be originated under the 

current General QM loan definition, and 

might not be originated at all, if the 

Temporary GSE QM loan definition 

were to expire. An additional, smaller 

number of loans that currently qualify 

as Temporary GSE QMs may not fall 

within the General QM loan definition 

after expiration of the Temporary GSE 

QM loan definition because the method 

used for verifying income or debt would 

not comply with appendix Q. 

After the Temporary GSE QM loan 

definition expires, the Bureau expects 

that many consumers with DTI ratios 

above 43 percent who would have 

received a Temporary GSE QM would 

instead obtain FHA-insured loans if the 

43 percent DTI limit remained in place. 

The Bureau estimated in the proposal 

that, in 2018, 11 percent of Temporary 

GSE QMs with DTI ratios above 43 

percent exceeded FHA’s loan-amount 

limit.213 Thus, the Bureau considers that 

at most 89 percent of loans that would 

have been Temporary GSE QMs with 

DTI ratios above 43 percent could move 

to FHA.214 The Bureau expects that 

loans that would be originated as FHA 

loans instead of under the Temporary 

GSE QM loan definition generally 

would cost materially more for many 

consumers, and that some consumers 

offered FHA loans might choose not to 

take out a mortgage because of these 

higher costs. Some consumers with DTI 

ratios above 43 percent would be able to 

obtain loans in the private market. The 

number of loans absorbed by the private 

market would likely depend, in part, on 

whether actors in the private market 

would be willing to assume the legal or 

credit risk associated with funding 

loans—as non-QM loans or smallcreditor portfolio QMs—that would 

have been Temporary GSE QMs (with 

DTI ratios above 43 percent) 215 and, if 

so, whether actors in the private market 

would offer more lower prices or better 

terms.216 Finally, some consumers with 

DTI ratios above 43 percent who would 

have sought Temporary GSE QMs may 

make different choices, such as 

adjusting their borrowing to result in a 

lower DTI ratio, if the 43 percent DTI 

limit remained in place.217 However, 

some consumers who would have 

sought Temporary GSE QMs (with DTI 

ratios above 43 percent) may not obtain 

loans at all.218 For example, based on 

application-level data obtained from 

nine large lenders, the Assessment 

Report found that the January 2013 

Final Rule eliminated between 63 and 

70 percent of non-GSE eligible home 

purchase loans with DTI ratios above 43 

percent.219

As described in the proposal and 

above, the Bureau is now adopting a 

price-based approach to replace the 

specific DTI limit in the General QM 

loan definition because the Bureau 

concludes that a loan’s price, as 

measured by comparing a loan’s APR to 

APOR for a comparable transaction, is a 

strong indicator of a consumer’s ability 

to repay. A loan’s price is not a direct 

measure of ability to repay, but the 

Bureau concludes that it is an effective 

indirect indicator for ability to repay. 

The Bureau’s delinquency analysis, 

analysis provided by commenters, and 

other analysis published in response to 

the Bureau’s requests for comment, 

provide strong evidence that rate 

spreads distinguish loans that are likely 

to have low early delinquency rates, and 

thus should receive a presumption of 

compliance with the ATR requirements, 

from loans that are likely to have higher 

rates of delinquency, which should not 

receive that presumption. The Bureau 

finds this to be the case across a range 

of datasets, time periods, loan types, 

measures of rate spread, and measures 

of delinquency. 

The Bureau acknowledged in the 

proposal that there is significant debate 

over whether a loan’s price, a 

consumer’s DTI ratio, or another direct 

or indirect measure of a consumer’s 

personal finances is a better predictor of 

loan performance, particularly when 

analyzed across various points in the 

economic cycle. Some commenters 

argued that DTI ratios are a better 

predictor of default than a loan’s price 

and therefore provide a better indicator 

of a consumer’s ability to repay. 

However, as noted in the proposal, the 

Bureau is not determining whether DTI 

ratios, a loan’s price, or some other 

measure is the best predictor of loan 

performance. Rather, the Bureau sought 

to balance considerations related to 

ensuring consumers’ ability to repay 

and maintaining access to responsible, 

affordable credit in selecting the pricebased approach, consistent with the 

purposes of the ATR/QM provisions of 

TILA. As noted, the Bureau’s 

delinquency analysis, along with other 

available evidence, provide strong 

evidence that rate spreads can 

distinguish loans that are likely to have 

low early delinquency rates from loans 

that are likely to have higher rates of 

early delinquency. Further, maintaining 

access to responsible, affordable 

mortgage credit after the expiration of 

the Temporary GSE QM loan definition 

is a critical policy goal, and the Bureau 

finds that the price-based approach 

would also further this goal. 

The Bureau further concludes that the 

price-based approach is a more holistic 

and flexible measure of a consumer’s 

ability to repay than DTI alone, as 


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described above and in the proposal. 

Mortgage underwriting, and by 

extension, a loan’s price, generally 

includes an assessment of additional 

factors, such as credit scores and cash 

reserves, that might compensate for a 

higher DTI ratio and that might also be 

probative of a consumer’s ability to 

repay. In contrast, the Bureau finds that 

a DTI limit may unduly restrict access 

to credit because it provides an 

incomplete picture of the consumer’s 

financial capacity. In particular, and as 

described above, the Bureau concludes 

that conditioning QM status on a 

specific DTI limit would likely impair 

access to credit for some consumers for 

whom it is appropriate to presume 

ability to repay their loans at 

consummation. Further, and as 

described above in part V.B.2, there is 

inherent flexibility for creditors in a 

price-based QM definition, which will 

facilitate innovation in underwriting, 

including use of emerging research into 

alternative mechanisms to assess a 

consumer’s ability to repay, such as 

cash flow underwriting. The Bureau 

concludes that the price-based approach 

best balances ability-to-repay 

considerations with ensuring continued 

access to responsible, affordable 

mortgage credit. 

The Bureau is also concerned that 

including a specific DTI limit in the 

General QM loan definition would be in 

tension with the changes to the debt and 

income verification requirements in this 

final rule. As described in the sectionby-section analysis of 

§ 1026.43(e)(2)(v)(B) below, the Bureau 

is finalizing a revised approach for 

verifying debt and income in 

§ 1026.43(e)(2)(v)(B) that provides 

flexibility for creditors to adopt 

innovative verification methods while 

also providing greater certainty that a 

loan has QM status. The revised 

verification approach allows creditors 

flexibility to use any reasonable 

verification method and criteria, 

provided that the creditor verifies debt 

and income using reasonably reliable 

third-party records. The final rule 

provides a safe harbor for creditors that 

use specific versions of manuals listed 

in commentary and provides that 

creditors also obtain a safe harbor if they 

‘‘mix and match’’ the verification 

standards in those manuals, or use 

revised versions of the manuals that are 

‘‘substantially similar’’ to the versions 

listed in the commentary. The Bureau is 

concerned that this verification 

approach, which provides flexibility to 

creditors in verifying debt and income, 

could create uncertainty if it were used 

in conjunction with a specific DTI limit. 

In particular, the Bureau is concerned 

that it could lead to disagreement 

among market participants over whether 

the DTI ratio for a given loan is above 

or below the limit and therefore whether 

the loan is a QM, which could 

complicate the sale of loans into the 

secondary market and disrupt access to 

credit. The Bureau has not identified 

verification approaches that, if used in 

conjunction with a specific DTI limit, 

would provide sufficient certainty to 

creditors, investors, and assignees 

regarding a loan’s QM status and also 

provide flexibility to creditors in order 

to preserve access to responsible, 

affordable mortgage credit. 

The Bureau also concludes that the 

price-based approach will ensure 

continued access to responsible, 

affordable mortgage credit after the 

expiration of the Temporary GSE QM 

loan definition. As described above, the 

proposal provided analysis of the 

potential effects on access to credit of a 

price-based approach to defining a 

General QM using 2018 HMDA data to 

estimate the percentage of conventional 

first-lien purchase loans within various 

price-based safe harbor and General QM 

thresholds. The Bureau has adjusted 

that analysis for the final rule to account 

for the final rule’s higher pricing 

threshold for some small manufactured 

home loans, discussed below in the 

section-by-section analysis of 

§ 1026.43(e)(2)(vi). The Bureau has also 

adjusted its analysis to reflect a revised 

methodology to identify creditors 

eligible to originate QMs as small 

creditors under § 1026.43(e)(5). 

Specifically, the Bureau lacks data on 

assets for certain non-depository 

creditors. The revised methodology 

estimates that such lenders have assets 

over $2 billion if their volume of 2018 

HMDA originations not reported as sold 

exceeds $400 million. This revised 

methodology slightly reduces the 

estimated number of creditors eligible to 

originate QMs as small creditors as 

compared to the proposal’s estimates. 

Specifically, a small number of nondepository creditors who primarily 

report loans as not sold (e.g., several 

creditors that specialize in 

manufactured home lending) are now 

estimated to be ineligible to originate 

QMs as small creditors. These 

adjustments are all reflected in Table 

7A. Table 7A also provides an estimate 

of the percentage of loans under the 

pricing thresholds of 1.5 percent above 

APOR (safe harbor) and 2.25 above 

APOR (rebuttable presumption) adopted 

in this final rule. 

TABLE 7A—FINAL RULE’S SHARE OF 2018 CONVENTIONAL FIRST-LIEN PURCHASE LOANS WITHIN VARIOUS PRICE-BASED

SAFE HARBOR (SH) QM AND REBUTTABLE PRESUMPTION (RP) QM DEFINITIONS

[HMDA data] 

Approach 

Safe harbor QM 

(share of 

conventional 

purchase market) 

QM overall 

(share of 

conventional 

purchase market) 

Temporary GSE QM + DTI 43 .................................................................................................................... 89.6 94.7 

Final Rule (SH 1.50, RP 2.25) .................................................................................................................... 91.3 96.3 

SH 0.75, RP 1.50 ........................................................................................................................................ 74.2 93.9 

SH 1.00, RP 1.50 ........................................................................................................................................ 83.1 93.9 

SH 1.25, RP 1.75 ........................................................................................................................................ 88.1 95.0 

SH 1.35, RP 2.00 ........................................................................................................................................ 89.6 95.8 

SH 1.40, RP 2.00 ........................................................................................................................................ 90.2 95.8 

SH 1.50, RP 2.00 ........................................................................................................................................ 91.3 95.8 

SH 1.75, RP 2.25 ........................................................................................................................................ 92.8 96.3 

SH 2.00, RP 2.50 ........................................................................................................................................ 93.9 96.6 

As discussed further below, the 

Bureau is maintaining the current safe 

harbor threshold for QMs, such that 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). As 


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220As discussed in the section-by-section analysis 

of § 1026.43(e)(2)(vi)(B)–(F), the Bureau proposed a 

loan amount threshold of $109,898 to align with the 

threshold for the limits on points and fees, as 

updated for inflation, in § 1026.43(e)(3)(i) and the 

associated commentary. On August 19, 2020, the 

Bureau issued a final rule adjusting the loan 

amounts for the limits on points and fees under 

§ 1026.43(e)(3)(i), based on the annual percentage 

change reflected in the CPI–U in effect on June 1, 

2020. 85 FR 50944 (Aug. 19, 2020). To ensure 

consistency, the Bureau is finalizing a loan amount 

threshold of $110,260 rather than a threshold of 

$109,898. 

221See 78 FR 6408, 6511 (Jan. 30, 2013). 

discussed in the section-by-section 

analysis of § 1026.43(e)(2)(vi)(A), the 

Bureau is adopting a threshold of 2.25 

percentage points over APOR for 

transactions with a loan amount greater 

than or equal to $110,260 (indexed for 

inflation).220 As shown in Table 7A, 

under these thresholds and using the 

2018 HMDA data, 91.3 percent of 

conventional purchase loans would 

have been safe harbor QMs and 96.3 

percent would have been safe harbor 

QMs or rebuttable presumption QMs. 

As discussed above in part V.B.3, the 

Bureau also analyzed the potential 

effects of a DTI-based approach on the 

size of the QM market, as reflected in 

Table 8 in the proposal and above. For 

comparison, the Bureau has also 

adjusted that analysis to reflect the 

revised methodology, discussed above, 

to identify creditors eligible to originate 

QMs as small creditors under 

§ 1026.43(e)(5). These adjustments are 

reflected in Table 8A. 

TABLE 8A—FINAL RULE’S SHARE OF 2018 CONVENTIONAL PURCHASE LOANS WITHIN VARIOUS SAFE HARBOR QM AND

REBUTTABLE PRESUMPTION QM DEFINITIONS (HMDA DATA) UNDER THE FINAL RULE

Approach 

Safe harbor QM 

(share of 

conventional 

market) 

QM overall 

(share of 

conventional 

market) 

Temporary GSE QM + DTI 43 .................................................................................................................... 89.6 94.7 

Final Rule (Pricing at 2.25) .......................................................................................................................... 91.3 96.3 

DTI limit 43 .................................................................................................................................................. 68.9 73.1 

DTI limit 45 .................................................................................................................................................. 75.7 80.5 

DTI limit 46 .................................................................................................................................................. 78.5 83.5 

DTI limit 47 .................................................................................................................................................. 81.1 86.3 

DTI limit 48 .................................................................................................................................................. 83.8 89.1 

DTI limit 49 .................................................................................................................................................. 86.7 92.2 

DTI limit 50 .................................................................................................................................................. 90.5 96.3 

As noted above, some commenters 

stated that the proposed price-based 

approach would expand access to credit 

for certain underserved market 

segments, such as low-income and 

minority consumers. At the same time, 

some commenters, including a 

consumer advocate commenter, 

expressed concern that a price-based 

approach would curtail access to credit 

for some low-income and minority 

consumers because these consumers are 

more likely to have mortgages with 

higher rate spreads. The Bureau 

concludes that the thresholds in the 

final rule best balance considerations 

related to ability to repay while 

retaining access to responsible, 

affordable mortgage credit, including for 

minority consumers. In particular, using 

2018 HMDA data that was used in the 

proposal to estimate the size of the QM 

market under various pricing 

thresholds, the Bureau estimates that 

96.8 percent of conventional purchase 

loans to minority consumers would 

receive QM status under the final rule, 

compared to 94.9 percent under the 

current rule with the Temporary GSE 

QM loan definition and the General QM 

loan definition with a DTI limit of 43 

percent, or 67.9 percent under only a 

General QM loan definition with a DTI 

limit of 43 percent. Under the proposed 

price-based thresholds, 95.5 percent of 

conventional purchase loans to minority 

consumers would have received QM 

status. 

Finally, the Bureau concludes that a 

price-based General QM loan definition 

will provide compliance certainty to 

creditors because they will be able to 

readily determine whether a loan is a 

General QM. As described above, 

creditors have experience with APR 

calculations due to the existing pricebased regulatory requirements and for 

various other disclosure and compliance 

reasons under Regulation Z. Creditors 

also have experience determining the 

appropriate APOR for use in calculating 

rate spreads. As such, the Bureau 

concludes that the price-based approach 

will provide certainty to creditors 

regarding a loan’s status as a QM. 

The Bureau acknowledges that a small 

percentage of loans eligible for General 

QM status under the current rule would 

be ineligible for General QM status 

under the final rule. Specifically, those 

are loans with DTI ratios below 43 

percent and that otherwise satisfy the 

current General QM loan definition that 

are priced above the rate-spread 

thresholds established by the final rule 

(e.g., 2.25 percentage points or higher 

for a first lien transaction with a loan 

amount greater than or equal to 

$110,260 (indexed for inflation)). As 

described below in the Dodd-Frank Act 

section 1022(b) analysis, the Bureau 

expects that creditors may adjust the 

price of some of these loans to meet the 

General QM pricing thresholds under 

the final rule. For other loans, creditors 

may instead originate those loans as 

non-QM loans or under other QM 

definitions, including as FHA loans, 

although the Bureau acknowledges that 

consumers may pay higher costs for 

these loans. The Bureau further 

acknowledges that some consumers who 

would be eligible for a General QM 

under the current rule but not under the 

final rule’s pricing thresholds may be 

unable to obtain a mortgage, although 

the Bureau expects that the number of 

such consumers will be small. As 

shown in Table 8A and discussed 

further below in the section-by-section 

analysis of § 1026.43(e)(2)(vi), the final 

rule represents an overall expansion of 

loans eligible for General QM status 

relative to the current definition. 

Further, and as the Bureau observed in 

the January 2013 rule, it is not possible 

to define by a bright-line rule a class of 

mortgages for which each consumer will 

have ability to repay.221 The Bureau’s 

decision to adopt a price-based 

approach reflects an appropriate balance 

of credit access and ability-to-repay 

considerations, taking into account the 

most efficient and effective means to 

ensure compliance. 


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222See supra note 207. 

223Neil Bhutta & Daniel Ringo, Effects of the 

Ability to Repay and Qualified Mortgage Rules on 

the Mortgage Market, FEDS Notes, Bd. of Governors 

of the Fed. Reserve Sys. (2015), https://

www.federalreserve.gov/econresdata/notes/fedsnotes/2015/effects-of-the-ability-to-repay-andqualified-mortgage-rules-on-the-mortgage-market20151229.html. 

The Bureau also acknowledges 

comments suggesting that a test that 

combines rate spread and DTI may 

better predict early delinquency rates 

than either metric on its own. However, 

the Bureau’s concerns about a DTI-based 

approach also apply to these hybrid 

approaches. The Bureau agrees with 

commenters asserting that hybrid 

approaches would be unduly complex 

and are not necessary given that price is 

also strongly correlated with loan 

performance, as described above. The 

Bureau also concludes that multi-factor 

approaches suggested by commenters 

are complex and unnecessary given that 

price is strongly correlated with loan 

performance. 

One commenter criticized the pricebased approach based on analysis 

showing that for loans with identical 

rate spreads, default occurrences vary, 

and for loans with similar default 

occurrences, the rate spreads vary 

greatly. The Bureau disagrees that such 

a finding shows that price is not an 

effective indicator of a consumer’s 

ability to repay. The commenter’s 

analysis shows that pricing and the 

commenter’s preferred risk metric are 

both correlated with early delinquency, 

even when holding the other metric 

fixed. This only demonstrates that 

neither metric is perfectly correlated 

with early delinquency and that each 

metric is predictive of early delinquency 

independently of the other. The Bureau 

has concluded that pricing is an 

effective indicator of a consumer’s 

ability to repay in part because it is 

strongly correlated with early 

delinquency, based on the Bureau’s 

delinquency analysis and external 

analysis described above, recognizing 

that there is not a perfect correlation 

between price and early delinquency. 

However, there also is not a perfect 

correlation between early delinquency 

and DTI, nor between early delinquency 

and the alternative measures proposed 

by commenters. Because many different 

factors are correlated with early 

delinquency, the Bureau expects that, 

even at a fixed level of one potential 

measure of a consumer’s ability to 

repay, early delinquency rates will still 

vary with other factors. While multifactor approaches that incorporate 

additional variables may achieve higher 

correlations with early delinquency, 

such approaches are more complex and 

may involve greater prescriptiveness. 

As noted above, a consumer advocate 

commenter expressed concern about the 

use of 60-day early delinquency rates in 

the first two years of a mortgage to 

measure ability to repay. That 

commenter raised concerns that 

mortgage payments may not be 

affordable but consumers may forgo 

paying other expenses so that they are 

able to continue making timely 

mortgage payments. The Bureau 

acknowledges that this may occur for 

some consumers, consistent with the 

Experian analysis cited by the consumer 

advocate commenter which showed that 

consumers with a mortgage and other 

credit obligations were less likely to be 

delinquent on their mortgage than on 

their other credit obligations.222

However, the Bureau believes that, as a 

general matter, 60-day early 

delinquencies in the first two years is an 

appropriate metric to measure ability to 

repay. Moreover, the Bureau notes that 

an analysis provided by a research 

center commenter, described above, 

measured loan performance by whether 

the consumer was ever 60 days or more 

delinquent, rather than by reference to 

the two-year period used in the Bureau’s 

delinquency analysis. The commenter 

noted that its analysis also found 

delinquency to be highly correlated 

with rate spreads, when delinquency is 

measured over the life of the loan. 

As noted above, some comments 

asserted that pricing is not an 

appropriate QM criterion because it 

reflects risk of loss to the creditor and 

not the consumer’s ability to repay the 

loan. The proposal recognized that there 

is a distinction between credit risk, 

which largely determines pricing 

relative to APOR, and a particular 

consumer’s ability to repay, which is 

one component of credit risk. While a 

consumer’s ability to afford loan 

payments is an important component of 

pricing, the loan’s price will reflect 

additional factors related to the loan 

that may not in all cases be probative of 

the consumer’s repayment ability. While 

the Bureau recognizes these concerns 

about a price-based approach, the 

Bureau’s delinquency analysis and the 

analyses by external parties discussed 

above provide evidence that rate 

spreads are correlated with 

delinquency. Further, the Bureau notes 

that the final rule includes a 

requirement to consider the consumer’s 

DTI ratio or residual income as part of 

the General QM loan definition, and to 

verify the debt and income used to 

calculate DTI or residual income. These 

requirements are discussed further 

below in the section-by-section analysis 

of § 1026.43(e)(2)(v)(A) and are included 

in the General QM loan definition to 

further ensure that, consistent with the 

purposes of TILA, creditors 

appropriately consider consumers’ 

financial capacity and that consumers 

are thus offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

Similarly, some commenters raised 

concerns that factors unrelated to the 

consumer, or the individual loan, can 

influence the price of a loan and that a 

price-based approach may be more 

consistent with some business models 

than others. Some commenters also 

raised concerns that a price-based 

approach is variable and that whether a 

consumer receives a General QM under 

the price-based approach may vary by 

creditor. While the Bureau 

acknowledges these criticisms of a 

price-based approach, the Bureau’s 

delinquency analysis and the analyses 

by external parties discussed above 

provide evidence that rate spreads are 

correlated with delinquency, across a 

range of datasets, time periods, loan 

types, measures of rate spread, and 

measures of delinquency. 

The Bureau also recognizes concerns 

that a price-based approach may 

incentivize some creditors to price some 

loans just below the threshold so that 

the loans will receive the presumption 

of compliance that comes with QM 

status. The proposal acknowledged that 

creditors are likely to react to the final 

rule by adjusting the price of some loans 

they offer to fall just below the 

threshold separating QMs from non-QM 

loans. To the extent creditors offer loans 

at lower prices to obtain QM status 

under the final rule, consumers will pay 

less for those loans. Those loans would 

also be subject to the QM productfeature restrictions and limits on points 

and fees, which would provide a benefit 

to consumers who might have otherwise 

received a non-QM loan that included a 

more risky product feature or included 

points and fees above the QM limits. 

The Bureau does not expect significant 

changes in loan pricing as a result of the 

safe harbor threshold, which exists 

under the current ATR/QM Rule. The 

Bureau points to research cited by some 

commenters, which suggests that, while 

creditors reacted to the safe harbor 

pricing threshold in the January 2013 

Final Rule by reducing the share of 

higher-priced mortgages that they 

originated, the economic significance of 

the response was minor and did not 

materially affect the mortgage market at 

the time the rule took effect.223

The Bureau disagrees with the 

comment asserting that the price-based 


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224See, e.g., TILA section 129C(b)(2)(C) 

(establishing distinct points-and-fees thresholds for 

QMs based on loan pricing); section 129C(c)(ii) 

(establishing price-based restrictions on QMs 

permitted to impose prepayment penalties). 225See section-by-section analysis of 

§ 1026.43(e)(2)(v)(A). 226 In the January 2013 Final Rule, the Bureau 

exercised its authority under TILA section 105(a) to 

provide, in the context of the ATR provisions in 

§ 1026.43(c)(2)(i), that a creditor may not look to the 

value of the dwelling that secures the covered 

transaction in assessing the consumer’s repayment 

ability, instead of providing that a creditor may not 

look to the consumer’s equity in the dwelling, as 

provided in TILA section 129C(a). The Bureau 

adopted this approach to provide broader 

protections to consumers. See 78 FR 6408, 6463– 

64 (Jan. 30, 2013). 

approach is inappropriate because LTV 

ratios are a component of pricing. 

Nothing in the statutory text of TILA 

prohibits the Bureau from adopting the 

price-based approach. Indeed, TILA 

provides the Bureau with considerable 

flexibility to determine the appropriate 

criteria to define QM and to adjust the 

statutory QM requirements as necessary 

or proper to achieve Congress’s 

objectives. The Bureau’s authority with 

respect to defining QMs is discussed 

above in part IV. 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). 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 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. In addition, TILA section 

129C(b)(3)(A) directs the Bureau to 

prescribe regulations to carry out the 

purposes of section 129C. 

The Bureau finds that the price-based 

approach is consistent with this 

authority and with the purposes of TILA 

and section 129C’s presumption of 

compliance with the ATR requirements 

for QMs. TILA sections 129B and 129C 

do not suggest that, in prohibiting 

creditors from considering the 

consumers’ equity in the property 

securing the transaction as a financial 

resource to repay the loan, Congress 

intended to limit the Bureau’s authority 

to impose loan pricing restrictions that, 

if incorporated into the QM definition, 

would provide sufficient assurance of 

the consumer’s ability to repay. The 

Dodd-Frank Act amendments to TILA 

rely on pricing thresholds to distinguish 

between and among categories of QM 

and non-QM loans that should receive 

heightened consumer protections.224

And, as described above, Dodd-Frank 

amendments to TILA in part codify and 

expand a pre-existing HOEPA regime 

that relied on pricing for similar 

purposes. Further, the Bureau notes that 

under this final rule creditors must 

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 to satisfy the General QM loan 

definition.225 In light of this 

requirement, including the exclusion of 

the value of the dwelling that secures 

the loan from the assets the creditor may 

consider for purposes of this 

requirement,226 the Bureau concludes 

that the price-based approach is 

consistent with TILA section 129C(a)(3). 

For these reasons, and consistent with 

the statutory text, structure and 

purposes of the TILA, the Bureau 

concludes that it is an appropriate use 

of its authority to include a loan’s price 

as one criterion to define General QMs. 

With respect to commenters 

expressing concern about the sensitivity 

of a price-based General QM loan 

definition to macroeconomic cycles, the 

Bureau acknowledged this concern in 

the proposal. The proposal noted that 

periods of economic expansion, 

increasing house prices, and strong 

demand from consumers with weaker 

credit characteristics often lead to 

greater availability of credit. This is 

because as house prices increase, home 

equity also increases, and secondary 

market investors expect fewer losses 

accordingly. Even if a consumer were to 

default, increasing collateral values 

make it more likely that the investors 

would still recover the full amount of 

their investment. This increased 

likelihood of recovery may result in an 

underpricing of credit risk. To the 

extent such underpricing occurs, rate 

spreads over APOR would compress 

and additional higher-priced, higherrisk loans would fit within the proposed 

General QM loan definition. Further, the 

proposal recognized that, during periods 

of economic downturn, investors’ 

demand for mortgage credit may fall as 

they seek safer investments to limit 

losses in the event of a broader 

economic decline. This may result in 

creditors reducing the availability of 

mortgage credit to riskier borrowers, 

through credit overlays and price 

increases, to protect against the risk that 

creditors may be unable to sell the loans 

profitably in the secondary markets, or 

even sell the loans at all. The proposal 

recognized that, while APOR would also 

increase during periods of economic 

stress and low secondary market 

liquidity, consumers with riskier credit 

characteristics may see disproportionate 

pricing increases relative to the 

increases in a more normal economic 

environment. These effects would likely 

make price-based QM standards procyclical, with a more expansive QM 

market when the economy is expanding, 

and a more restrictive QM market when 

credit is tight. As a result, a rate spreadbased QM threshold would likely be 

less effective than a binding DTI limit in 

deterring risky loans during periods of 

strong housing price growth or 

encouraging safe loans during periods of 

weak housing price growth. As 

described above, some commenters to 

the proposal highlighted these concerns 

and argued that the Bureau should not 

finalize the price-based approach due to 

potential systemic risks. However, the 

Bureau notes that a binding DTI limit 

risks restricting access to affordable 

credit relative to this final rule. The 

Bureau concludes that the advantages of 

the price-based approach in providing a 

flexible and holistic indicator of ability 

to repay outweigh the macroeconomic 

cycle concerns as considerations toward 

ensuring the availability of responsible, 

affordable mortgage credit. In addition, 

the Bureau believes that the QM product 

feature restrictions, the consider and 

verify requirements, and the final rule’s 

special rule for ARMs mitigate some 

concerns regarding the pro-cyclical risks 

during economic expansions. 

As noted, a commenter expressed 

concern that the Bureau’s delinquency 

analysis does not reflect the full extent 

of rate compression. That commenter 

argued that the Bureau should analyze 

rate spreads and associated default risk 

by vintage year, citing analysis showing 

that rate spreads fell significantly 

between 2004 and 2006 and suggesting 

that the Bureau’s analysis therefore may 

not capture potential declines in the 

correlation between price and early 

delinquency rates at the height of the 

subprime mortgage boom. With respect 

to this comment, the Bureau recognizes, 

as stated above, that there is not a 


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227While the Bureau’s conclusion on the strong 

correlation between pricing and early delinquency 

is based on its own delinquency analysis in this 

final rule, an Urban Institute analysis cited by a 

commenter also showed a positive correlation 

between pricing and rate spread during the years 

2005 to 2008, largely covering the market 

conditions present during the subprime mortgage 

boom. See supra note 194. 

228With respect to the commenter who presented 

analysis of subprime loans from the 2000s housing 

boom and asserted that the data show that pricing 

as a measure of ability to repay fails when there is 

a credit boom due to rate spread compression, the 

Bureau notes that it is unclear from the analysis 

whether these loans would have also satisfied the 

QM product feature restrictions and limits on 

points and fees, or how the performance of the 

loans varied with rate spreads. 

229See, 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-consentorder.pdf (joint action for discriminatory mortgage 

lending practices including charging AfricanAmerican customers for certain mortgage loans 

more than non-Hispanic White borrowers with 

similar loan qualifications). 

230 78 FR 6408, 6534 (Jan. 13, 2013) (stating that 

the Bureau believed it was appropriate to presume 

that loans that are eligible to be purchased or 

guaranteed by the GSEs ‘‘while under 

conservatorship’’ have been originated with 

appropriate consideration of consumers’ ability to 

repay ‘‘in light of this significant Federal role and 

the government’s focus on affordability in the wake 

of the mortgage crisis’’). 

perfect correlation between pricing and 

early delinquency rates. However, the 

Bureau has concluded that pricing is 

strongly correlated with early 

delinquency, based on the Bureau’s 

delinquency analysis, external analysis 

described in the proposal, and analysis 

provided by commenters, which cover a 

wide range of years and economic 

conditions.227 With respect to other 

commenters that expressed concerns 

about fluctuations in rate spreads over 

time, the Bureau recognizes that overall 

market spreads expand and tighten over 

time, as described above.228 The Bureau 

concludes the pricing thresholds in the 

final rule provide the best balance 

between ability-to-repay considerations 

and ensuring access to responsible, 

affordable mortgage credit. The Bureau 

further notes that it monitors changing 

market and economic conditions and it 

could consider changes to the 

thresholds if circumstances warrant. 

With respect to commenters that 

expressed concern about the connection 

between the price-based General QM 

loan definition and fair lending laws, 

including ECOA and the Fair Housing 

Act, 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 nonHispanic White borrowers with similar 

credit characteristics, and the Bureau 

reaffirms its commitment to consistent, 

efficient, and effective enforcement of 

Federal fair lending laws.229 The Bureau 

further emphasizes that the General QM 

loan definition, as amended by this final 

rule, does not create an inference or 

presumption that a loan satisfying the 

General QM loan definition is compliant 

with any Federal, State, or local antidiscrimination laws that pertain to 

lending. A creditor has an independent 

obligation to comply with ECOA and 

Regulation B, and an effective way for 

a creditor to minimize and evaluate fair 

lending risks under these laws is by 

monitoring their policies and practices 

and implementing effective compliance 

management systems. The Bureau 

declines to amend the ATR/QM Rule to 

provide that a loan loses its QM safe 

harbor status if there is a confirmed 

instance of discriminatory pricing on a 

prohibited basis that is not self-reported 

and remedied by the creditor. 

The Bureau disagrees with 

commenters who assert that the pricebased General QM loan definition does 

not advance fair lending. As noted 

above, the Bureau concludes that 

conditioning QM status on a specific 

DTI limit may impair access to 

responsible, affordable credit for some 

consumers for whom it might be 

appropriate to presume ability to repay 

their loans at consummation. 

Specifically, using a bright-line DTI 

ratio threshold may have an adverse 

impact on responsible access to credit, 

including for low-to-moderate-income 

and minority homeowners. As 

discussed above, a price-based General 

QM loan definition is better than the 

alternatives because a loan’s price, as 

measured by comparing a loan’s APR to 

APOR for a comparable transaction, is a 

strong indicator of a consumer’s ability 

to repay and is a more holistic and 

flexible measure of a consumer’s ability 

to repay than DTI alone. The Bureau 

therefore expects that this final rule will 

improve access to credit for low-tomoderate-income and minority 

homeowners, without the unnecessary 

complexity of hybrid or multi-factor 

alternatives urged by some commenters. 

With respect to the comment that 

provided analysis of loan performance 

for loans secured by condominiums and 

urged the Bureau to study the 

relationship between high DTI ratios, 

property type, and delinquency prior to 

issuing the final rule or expand its 

delinquency analysis to include 

property type as a variable, the Bureau 

declines to undertake that further 

analysis at this time. As described 

above, the Bureau has concluded that 

pricing is strongly correlated with early 

delinquency and is concerned that a DTI 

limit may have an adverse impact on 

responsible access to credit. The Bureau 

also notes that fees and special 

assessments imposed by a 

condominium, cooperative, or 

homeowners association are mortgagerelated obligations that must be 

included in the calculation of the 

consumer’s debt-to-income or residual 

income for purposes of 

§ 1026.43(e)(2)(v)(A) and therefore are 

incorporated into the General QM loan 

definition. Further, mortgage creditors 

often account for the property type 

when pricing a mortgage, and the ratespread threshold would thus capture 

any differential risk for such loans that 

is reflected in their price. However, the 

Bureau will monitor the effects of the 

General QM final rule to determine if 

future changes are necessary to ensure 

continued access to responsible, 

affordable credit, including for 

particular property types such as 

condominiums. 

The Bureau also declines to eliminate 

the conservatorship clause of the 

Temporary GSE QM loan definition. As 

explained in the Extension Final Rule, 

when the Bureau adopted the January 

2013 Final Rule, the FHFA’s 

conservatorship of the GSEs was central 

to its willingness to presume that loans 

that are eligible for purchase, guarantee, 

or insurance by the GSEs would be 

originated with appropriate 

consideration of consumers’ ability to 

repay.230 If the GSEs are not under 

conservatorship, the Bureau is 

concerned about presuming that loans 

eligible for purchase or guarantee by 

either of the GSEs have been originated 

with appropriate consideration of the 

consumer’s ability to repay. 

With respect to the comment that 

expressed concern about the expiration 

of the Temporary GSE QM loan 

definition in light of the current GSE 

loan market, the Bureau anticipates that 

the final rule will preserve access to 

credit relative to the status quo. In 

particular, the Bureau concludes the 

General QM loan definition’s pricing 

thresholds included in this final rule, in 

conjunction with the debt and income 

verification provisions in 

§ 1026.43(e)(2)(v)(B), will ensure 

continued access to responsible, 

affordable mortgage credit, including for 

loans that have historically been eligible 

for purchase by the GSEs. With respect 

to the comment suggesting the Bureau 

consider evaluating changes to the 

General QM loan definition and the 

Seasoned QM Proposal at the same time, 

the Bureau has considered the expected 

effects of both proposals and is issuing 

rules on both of these topics at the same 

time. 


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231As discussed in the section-by-section analysis 

of § 1026.43(e)(2)(vi) below, this final rule provides 

that loans with an APR exceeding the APOR by 2.25 

percentage points or more (or exceeding higher 

thresholds for certain small or subordinate-lien 

loans) are not eligible for General QM status under 

§ 1026.43(e)(2). Unless otherwise eligible for QM 

status (such as under § 1026.43(e)(5) or 

§ 1026.43(f)), for non-QM loans a creditor must 

make a reasonable and good faith determination of 

the consumer’s ability to repay and does not receive 

a presumption of compliance. 

232Subordinate-lien transactions are discussed 

below in the section-by-section analysis of 

§ 1026.43(e)(2)(vi). 

233 78 FR 6408, 6507 (Jan. 30, 2013). 

234 Id. at 6511. 

235 Id. at 6514. 

236 Id. at 6511. 

237 Id. 

238 Id. 

239 Id. 

240 Id. 

241 Id. 

242 Id. 243 Id. 244 Id. at 6511. 245 Id. at 6511–13. 246Subordinate-lien transactions are discussed 

below in the section-by-section analysis of 

§ 1026.43(e)(2)(vi). 

C. The QM Presumption of Compliance 

Under a Price-Based General QM Loan 

Definition 

To address potential uncertainty 

regarding the reasonableness of some 

ability-to-repay determinations, all QMs 

provide creditors with a presumption of 

compliance with the ATR requirements. 

Lower-priced QMs provide a conclusive 

presumption of compliance (i.e., a safe 

harbor) whereas higher-priced QMs 

provide a rebuttable presumption of 

compliance.231 The proposal would 

have preserved the current 

§ 1026.43(b)(4) pricing threshold that 

generally separates safe harbor QMs 

from rebuttable presumption QMs, such 

that a loan is a safe harbor QM if its APR 

exceeds APOR for a comparable 

transaction by less than 1.5 percentage 

points as of the date the interest rate is 

set (or by less than 3.5 percentage points 

for subordinate-lien transactions).232

1. Considerations Related to the Safe 

Harbor Threshold 

As stated in the proposal, in 

developing the approach to the 

presumptions of compliance for QMs in 

the January 2013 Final Rule, the Bureau 

first considered whether the statute 

prescribes if QMs receive a conclusive 

or rebuttable presumption of 

compliance with the ATR provisions. 

As discussed above in part II.A, 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. 

However, 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 demonstrates 

that there are sound reasons for 

adopting either interpretation.233 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.234 The Bureau interpreted the 

statute to provide for a rebuttable 

presumption of compliance with the 

ATR provisions but used its adjustment 

and exception authority to establish a 

conclusive presumption of compliance 

for loans that are not ‘‘higher-priced 

covered transactions.’’ 235

In the January 2013 Final Rule, the 

Bureau identified several reasons why 

loans that are not higher-priced loans 

(generally prime loans) should receive a 

safe harbor. The Bureau noted that the 

fact that a consumer receives a prime 

rate is itself indicative of the absence of 

any indicia that would warrant a loanlevel price adjustment, and thus is 

suggestive of the consumer’s ability to 

repay.236 The Bureau noted that prime 

rate loans have performed significantly 

better historically than subprime loans 

and that the prime segment of the 

market has been subject to fewer 

abuses.237 The Bureau noted that the 

QM requirements will ensure that the 

loans do not contain certain risky 

product features and are underwritten 

with careful attention to consumers’ DTI 

ratios.238 The Bureau also 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.239 The Bureau 

determined that if a loan met the 

product and underwriting requirements 

for QM and was not a higher-priced 

covered transaction, there are sufficient 

grounds for concluding that the creditor 

satisfied the ATR provisions.240

The Bureau in the January 2013 Final 

Rule pointed to factors to support its 

decision to adopt a rebuttable 

presumption for QMs that are higherpriced covered transactions. The Bureau 

noted that QM requirements, including 

the restrictions on product features and 

the 43 percent DTI limit, would help 

prevent the return of the lax lending 

practices of some lenders in the years 

before the financial crisis, but that it is 

not possible to define by a bright-line 

rule a class of mortgages for which each 

consumer will have ability to repay, 

particularly for subprime loans.241 The 

Bureau noted that subprime pricing is 

often the result of loan-level price 

adjustments established by the 

secondary market and calibrated to 

default risk.242 The Bureau also noted 

that consumers in the subprime market 

tend to be less sophisticated and have 

fewer options and thus are more 

susceptible to predatory lending 

practices.243 The Bureau noted that 

subprime loans have performed 

considerably worse than prime loans.244

The Bureau therefore concluded that 

QMs that are higher-priced covered 

transactions would receive a rebuttable 

presumption of compliance with the 

ATR provisions. The Bureau recognized 

that this approach could increase by a 

modest amount the litigation risk for 

subprime QMs but did not expect that 

imposing a rebuttable presumption for 

higher-priced QMs would have a 

significant impact on access to credit.245

2. The Bureau’s Proposal 

The safe harbor threshold. The 

Bureau did not propose to alter the 

approach in the current ATR/QM Rule, 

under current § 1026.43(b)(4) and 

(e)(1)(i), of providing a conclusive 

presumption of compliance with the 

ATR requirements (i.e., a safe harbor) to 

loans that meet the General QM 

requirements in § 1026.43(e)(2) and for 

which the APR exceeds the APOR by 

less than 1.5 percentage points (or by 

less than 3.5 percentage points for 

subordinate-lien loans).246 In the 

proposal, when discussing the safe 

harbor threshold, the Bureau restated its 

preliminary conclusion that pricing is 

strongly correlated with loan 

performance and that pricing thresholds 

should be included in the General QM 

loan definition in § 1026.43(e)(2). The 

Bureau also preliminarily concluded 

that for prime loans, the pricing, in 

conjunction with the revised QM 

requirements in proposed 

§ 1026.43(e)(2), provides sufficient 

grounds for supporting a conclusive 

presumption that the creditor complied 

with the ATR requirements. The Bureau 

further noted that, under the proposed 

price-based approach, creditors would 

be required to consider DTI or residual 

income for a loan to satisfy the 

requirements of the General QM loan 

definition. The Bureau also stated that 

a safe harbor for prime QMs appears to 

be supported by the better performance 

of prime loans compared to subprime 

loans, and by the potential benefits of 

greater competition and access to credit 

from the greater certainty and reduced 

litigation risk arising from a safe harbor. 


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247However, as discussed in the section-bysection analysis of § 1026.43(e)(2)(vi) below, under 

the proposal a loan would not have been eligible 

for QM status (i.e., would not receive any 

presumption of compliance with the ATR 

requirements) under § 1026.43(e)(2) if the loan 

exceeded the separate pricing thresholds in 

proposed § 1026.43(e)(2)(vi). 

248 78 FR 6408, 6512 (Jan. 30, 2013). 

249See Regulation Z comment 34(a)(4)(iii)–1. 

250 78 FR 6408, 6511–12 (Jan. 30, 2013). The 

Bureau in the January 2013 Final Rule stated that 

it interpreted TILA section 129C(b)(1) to create a 

rebuttable presumption of compliance with the 

ATR requirements, but exercised its adjustment 

authority under TILA section 105(a) to limit the 

ability to rebut the presumption because the Bureau 

found that an open-ended rebuttable presumption 

would unduly restrict access to credit without a 

corresponding benefit to consumers. Id. at 6514. 

The Bureau tentatively concluded that 

the current safe harbor threshold of 1.5 

percentage points for first liens restricts 

safe harbor QMs to lower-priced, 

generally less risky, loans while 

ensuring that responsible, affordable 

credit remains available to consumers. 

The Bureau stated its general belief that 

these same considerations support not 

changing the current safe harbor 

threshold of 3.5 percentage points for 

subordinate-lien transactions, which 

generally perform better and have 

stronger credit characteristics than firstlien transactions. The Bureau’s proposal 

to address subordinate-lien transactions 

is discussed further below in the 

section-by-section analysis of 

§ 1026.43(e)(2)(vi). For the reasons 

discussed below, this final rule is 

maintaining the current safe harbor 

thresholds in current § 1026.43(b)(4) 

and (e)(1)(i). 

Rebuttable Presumption QMs. The 

proposal generally would have 

maintained the current ATR/QM Rule’s 

rebuttable presumption of compliance 

with the ATR requirements for loans 

that exceed the safe harbor threshold 

but that otherwise meet the General QM 

requirements in § 1026.43(e)(2).247 The 

Bureau did not propose to revise 

§ 1026.43(e)(1)(ii)(B), which defines the 

grounds on which the presumption of 

compliance that applies to higher-priced 

QMs can be rebutted. Section 

1026.43(e)(1)(ii)(B) provides that a 

consumer may rebut the presumption by 

showing that, at the time the loan was 

originated, the consumer’s income and 

debt obligations left insufficient residual 

income or assets to meet living 

expenses. The analysis considers the 

consumer’s monthly payments on the 

loan, mortgage-related obligations, and 

any simultaneous loans of which the 

creditor was aware, as well as any 

recurring, material living expenses of 

which the creditor was aware. The 

Bureau stated in the January 2013 Final 

Rule that this standard was sufficiently 

broad to provide consumers a 

reasonable opportunity to demonstrate 

that the creditor did not have a good 

faith and reasonable belief in the 

consumer’s repayment ability, despite 

meeting the prerequisites of a QM. At 

the same time, the Bureau stated that it 

believed the standard was sufficiently 

clear to provide certainty to creditors, 

investors, and regulators about the 

standards by which the presumption 

can successfully be rebutted in cases in 

which creditors have met the QM 

requirements. The Bureau also noted 

that the standard was consistent with 

the standard in the 2008 HOEPA Final 

Rule.248 Commentary to that rule 

provides, as an example of how its 

presumption may be rebutted, that the 

consumer could show ‘‘a very high debtto-income ratio and a very limited 

residual income . . . depending on all 

of the facts and circumstances.’’ 249 The 

Bureau noted that, under the definition 

of QM that the Bureau was adopting, the 

creditor was generally not entitled to a 

presumption if the consumer’s DTI ratio 

was ‘‘very high.’’ As a result, the Bureau 

focused on the standard for rebutting 

the presumption in the January 2013 

Final Rule on whether, despite meeting 

a DTI test, the consumer nonetheless 

had insufficient residual income to 

cover the consumer’s living expenses.250

The Bureau did not propose to change 

the standard for rebutting the 

presumption of compliance with the 

ATR requirements and stated its belief 

that the existing standard continues to 

balance consumer protection and 

access-to-credit considerations. For 

example, the Bureau did not propose 

amending the presumption of 

compliance to provide that the 

consumer may use the DTI ratio to rebut 

the presumption of compliance by 

establishing that the DTI ratio is very 

high, or by establishing that the DTI 

ratio is very high and that the residual 

income is not sufficient. First, the 

Bureau tentatively determined that 

permitting the consumer to rebut the 

presumption by establishing that the 

DTI ratio is very high is not necessary 

because the existing rebuttal standard 

already incorporates an examination of 

the consumer’s actual income and debt 

obligations (i.e., the components of the 

DTI ratio) by providing the consumer 

the option to show that the consumer’s 

residual income—which is calculated 

using the same components—was 

insufficient at consummation. 

Accordingly, the Bureau anticipated 

that the addition of a DTI ratio to the 

rebuttal standard would not add 

probative value beyond the current 

residual income test in 

§ 1026.43(e)(1)(ii)(B). Second, the 

Bureau anticipated that the addition of 

a DTI ratio as a ground to rebut the 

presumption of compliance would 

undermine compliance certainty to 

creditors and the secondary market 

without providing any clear benefit to 

consumers. The Bureau tentatively 

determined that the rebuttable 

presumption standard would continue 

to be sufficiently broad to provide 

consumers a reasonable opportunity to 

demonstrate that the creditor did not 

have a good faith and reasonable belief 

in the consumer’s repayment ability, 

despite meeting QM standards. The 

Bureau did not receive comments 

regarding the grounds on which the 

presumption of compliance can be 

rebutted. 

3. Comments on the Safe Harbor 

Threshold 

The Bureau received several 

comments concerning the proposed 1.5- 

percentage-point safe harbor threshold. 

A joint comment from consumer 

advocates stated that, if the Bureau 

finalizes a price-based approach, the 

proposed threshold should not be 

increased. A GSE commenter supported 

the 1.5-percentage-point threshold and 

stated it would be equally supportive if 

the Bureau increases the threshold. 

Various commenters, including a 

research center and several consumer 

advocate and industry commenters, 

specifically recommended increasing 

the safe harbor threshold to 2 percentage 

points. Commenters generally 

acknowledged that delinquency rates for 

safe harbor QMs would increase as the 

pricing threshold increases but 

expressed differing views on whether 

the proposed threshold should 

nonetheless be increased to expand 

access to credit. 

A joint comment from consumer 

advocates generally objected to a pricebased approach but specifically stated 

that increasing the safe harbor threshold 

would not significantly increase access 

to credit. The joint comment stated that 

the ATR/QM Rule’s 1.5-percentagepoint threshold is consistent with the 

Board’s 2008 HOEPA Final Rule, which 

offered only a rebuttable presumption— 

not a safe harbor—for loans priced 1.5 

percentage points or more above APOR. 

The joint comment stated that in 

markets with less competition, 

including minority communities, 

creditors routinely face no downward 

pressure on prices and will charge 

consumers more than they would in a 

more competitive market. The joint 

comment stated that, in less competitive 

markets, the current 1.5-percentagepoint safe harbor threshold has 


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251 Davis et al., supra note 179. 

252Bureau of Consumer Fin. Prot., Data Point: 

2019 Mortgage Market Activity and Trends (June 

2020), https://files.consumerfinance.gov/f/ 

documents/cfpb_2019-mortgage-market-activitytrends_report.pdf (4.6 percent of conventional, firstlien loans for purchasing one-to-four-family, owneroccupied, site-built homes). As explained in the 

Assessment Report, because of their nearly identical 

definitions, HMDA data regarding higher-priced 

mortgage loans (HPMLs) may serve as a proxy for 

higher-priced covered transactions under the ATR/ 

QM Rule. 

253See Bhutta & Ringo, supra note 223. 

benefited consumers by providing some 

downward pressure on prices. 

Notwithstanding such creditor reticence 

to price loans beyond the safe harbor 

threshold, the joint comment stated that 

there has not been an actual difference 

in litigation risk (i.e., for rebuttable 

presumption QMs versus safe harbor 

QMs) that would reasonably justify 

increasing the threshold. The joint 

comment further stated that increasing 

the safe harbor pricing threshold would 

not expand consumers’ access to credit 

but instead would facilitate creditors 

raising prices to take advantage of less 

competitive markets and result in the 

same consumers obtaining the same 

loans but at higher prices. 

A research center generally objected 

to a price-based approach but also stated 

that increasing the safe harbor threshold 

would not have a significant impact on 

access to credit. Based on 2018 loan 

data, the commenter stated that the 

current pricing threshold has relatively 

little impact on originating rebuttable 

presumption QMs priced 1.5 percentage 

points or more above APOR. Moreover, 

the commenter stated that even for 

rebuttable presumption QMs, litigation 

risk would be significantly reduced by 

the proposed rule’s income and debt 

verification safe harbor, as discussed in 

the section-by-section analysis of 

§ 1026.43(e)(2)(v)(B). 

Various commenters, including a 

research center and multiple consumer 

advocate and industry commenters, 

specifically recommended increasing 

the safe harbor threshold to 2 percentage 

points, arguing that it would achieve a 

better balance of ability to repay with 

access to credit. Several of those 

commenters referenced the research 

center’s analysis of Fannie Mae and 

Black Knight McDash data and stated 

that a 2-percentage-point threshold 

would increase the delinquency rate for 

safe harbor QMs. However, that subset 

of commenters argued that the analysis 

showed that the increased delinquency 

rate would nonetheless remain low 

relative to delinquency rates 

experienced in the past 20 years. Those 

commenters stated that addressing 

access-to-credit concerns with a 2- 

percentage-point threshold would 

therefore strike an appropriate balance 

with ability-to-repay concerns. One 

consumer advocate commenter stated 

that delinquency rate improvement, 

relative to the Great Recession, is largely 

due to the effects of the Dodd-Frank Act, 

which has helped ensure stronger 

product protections, better 

underwriting, and improved income, 

employment, and asset verification and 

documentation. Citing an FHFA 

working paper that was also cited in the 

General QM Proposal,251 a joint 

comment from consumer advocate and 

industry groups stated that loans with 

non-QM features—including interestonly loans, ARM loans that combined 

teaser rates with subsequent large jumps 

in payments, negative amortization 

loans, and loans made with limited or 

no documentation of the borrower’s 

income or assets—accounted for about 

half of the rise in risk leading up to the 

2008 financial crisis and subsequent 

passage of the Dodd-Frank Act. Given 

that the delinquency rate would be low 

on a relative basis, these commenters 

stated that addressing access-to-credit 

concerns with a 2-percentage-point 

threshold would strike an appropriate 

balance with ability-to-repay concerns. 

Multiple consumer advocate and 

industry commenters stated that, in 

contrast to safe harbor QMs, creditors 

generally are less willing to make 

rebuttable presumption QMs. These 

commenters stated that their 

unwillingness to make rebuttable 

presumption QMs is evidenced by 2019 

HMDA data showing that less than 5 

percent of conventional, first-lien 

purchase loans were priced 1.5 

percentage points or more above 

APOR.252 Citing Board economists’ 

analysis of 2014 HMDA data,253 a joint 

comment from consumer advocate and 

industry groups stated that creditors 

reduced the share of higher-priced 

mortgages that they originated in 

response to the ATR/QM Rule. A 

research center stated that, based on 

2019 HMDA data, increasing the safe 

harbor threshold to 2 percentage points 

would have replaced 75,265 rebuttable 

presumption QMs with safe harbor QMs 

instead. The research center stated that, 

because safe harbor QMs would provide 

those loans’ creditors with greater 

protection from litigation than 

rebuttable presumption QMs, it suspects 

that the reduction in litigation risk 

would result in better pricing for 

consumers. The research center, as well 

as multiple consumer advocate and 

industry commenters, stated that 

increasing the safe harbor threshold to 

2 percentage points would improve 

access to credit by reducing racial and 

ethnic disparities while helping 

increase lending volumes for every 

racial and ethnic group. 

Several industry commenters 

elaborated on how rebuttable 

presumption QMs present more 

litigation risk to creditors than safe 

harbor QMs. One commenter stated 

that—even if a creditor has, in fact, 

made a reasonable and good faith 

determination of a consumer’s 

repayment ability at the time of 

consummation—a creditor could still 

find itself in court providing evidentiary 

proof should a consumer challenge a 

rebuttable presumption QM. As a 

general matter, another commenter 

stated that—even if a defendant 

ultimately prevails in court—legal 

determinations regarding 

‘‘reasonableness’’ are expensive to 

defend as they often require timeconsuming litigation, extensive 

discovery, and possibly a trial. Another 

commenter stated that—even among 

creditors that would ultimately prevail 

in court—some creditors will choose the 

expense of settling with plaintiffs, rather 

than incurring the greater expense of 

paying a legal team to continue 

defending in court. The commenter 

stated that the safe harbor’s conclusive 

presumption of compliance is necessary 

to stop meritless ability-to-repay 

litigation as early as possible in the legal 

process and to eliminate the settlement 

value of such litigation. These industry 

commenters each stated that increasing 

the safe harbor threshold to 2 percentage 

points would help address the negative 

effect that litigation risk has on access 

to credit. 

Various commenters, including a 

research center and multiple consumer 

advocate and industry commenters, 

stated that increasing the safe harbor 

threshold in the Bureau’s ATR/QM Rule 

to 2 percentage points would create a 

more level playing field between 

conventional and FHA lending. These 

commenters stated that FHA’s own QM 

rule provides creditors with a safe 

harbor if the loan’s APR is no more than 

APOR plus the FHA annual mortgage 

insurance premium plus 115 basis 

points. These commenters further stated 

that the current FHA annual mortgage 

insurance premium is 85 basis points, 

such that the FHA’s QM rule effectively 

has a 2-percentage-point-over-APOR 

threshold. Some comments, including 

one from a consumer advocate 

commenter and a joint comment from 

consumer advocate and industry groups, 

stated that the Bureau’s current 1.5- 

percentage-point safe harbor threshold 

has the effect of steering consumers, 

including minority consumers, to FHA 

loans rather than conventional loans 


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254Fed. Hous. Fin. Agency, Enterprise Regulatory 

Capital Framework Final Rule (2020), https://

www.fhfa.gov/SupervisionRegulation/Rules/Pages/ 

Enterprise-Regulatory-Capital-Framework-FinalRule.aspx (Final Rule currently available on the 

FHFA website and awaiting Federal Register 

publication). 

255Subordinate-lien transactions are discussed 

below in the section-by-section analysis of 

§ 1026.43(e)(2)(vi). 

256Assessment Report, supra note 63, section 5.5, 

at 187. 

257See Bhutta & Ringo, supra note 223. 

258As discussed in the section-by-section analysis 

of § 1026.43(e)(2)(vi)(A) below, this final rule 

generally provides that, for transactions that are 

covered by § 1026.43(e)(2)(vi)(A) and priced greater 

than or equal to 1.5 but less than 2.25 percentage 

points above APOR, the transaction receives a 

rebuttable QM (rather than a conclusive QM) 

presumption of compliance with the ATR 

requirements. 

259As discussed in the section-by-section analysis 

of § 1026.43(e)(2)(vi)(A) below, this final rule 

generally provides that, for transactions that are 

covered by § 1026.43(e)(2)(vi)(A) and priced greater 

than or equal to 1.5 but less than 2.25 percentage 

and thus limits consumer choice among 

lenders and product offerings. Those 

comments further stated that a smaller 

pool of lenders originate FHA loans and 

that in 2019 there were approximately 

3,200 HMDA reporting lenders for 

conventional purchase loans versus 

approximately 1,200 HMDA reporting 

lenders for FHA purchase loans. 

Various commenters, including a 

research center and multiple consumer 

advocate and industry commenters, also 

stated that rate spreads fluctuate over 

time and recommended that this final 

rule increase pricing thresholds as a 

buffer to absorb the pricing impact of 

future market changes. In particular, 

regarding FHFA’s GSE capital rule,254

these commenters stated that it would 

require GSEs to maintain more capital 

as a precaution against riskier loans in 

their portfolio (i.e., risk-based capital 

requirements). These commenters stated 

that they expect spreads over APOR will 

likely increase for riskier borrowers as a 

result of the FHFA’s rule. The research 

center also stated that spreads for 

refinance loans could widen relative to 

APOR in response to the additional 

loan-level price adjustment of 50 basis 

points on most Fannie Mae and Freddie 

Mac refinances, effective December 1, 

2020. However, an industry commenter 

stated that such changes also affect 

APOR itself, which adds further 

uncertainty regarding the actual 

magnitude of any future changes to 

spreads over APOR. 

4. The Final Rule 

For the reasons discussed below, as 

proposed, the Bureau is maintaining the 

current safe harbor threshold in 

§ 1026.43(b)(4), such that a loan is a safe 

harbor QM under § 1026.43(e)(1) 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).255 The 

Bureau concludes that maintaining the 

current 1.5-percentage-point threshold, 

in conjunction with the revised General 

QM requirements in proposed 

§ 1026.43(e)(2), addresses access-tocredit concerns while striking an 

appropriate balance with ability-torepay concerns. 

The Bureau declines to extend the 

safe harbor to loans priced 1.5 

percentage points or more above APOR 

given that such loans have higher 

delinquency rates and have, since the 

January 2013 Final Rule took effect, 

received a rebuttable presumption of 

compliance with the Bureau’s ATR/QM 

rule with no evidence to suggest that the 

1.5-percentage-point line has caused a 

significant disruption of access to 

responsible, affordable mortgage credit. 

Further, since the Board’s 2008 rule, 

loans priced above the current 1.5- 

percentage-point threshold have been 

subject to an ability-to-repay 

requirement that is substantially similar 

to the rebuttable presumption standard 

for QMs under the Bureau’s ATR/QM 

Rule. Consistent with one of the 

research center comments discussed 

above, HMDA data analyzed by the 

Bureau in the Assessment Report 

suggest that the safe harbor threshold of 

1.5 percentage points has not 

constrained creditors, as the share of 

originations above the safe harbor 

threshold remained steady after the 

implementation of the ATR/QM Rule.256

In response to various commenters 

above who stated that less than 5 

percent of conventional, first-lien 

purchase loans were priced 1.5 

percentage points or more above APOR, 

the Bureau is unaware of reliable data 

evidencing that the low lending levels at 

higher rate spreads are caused by the 1.5 

percentage point safe harbor threshold 

as opposed to other factors. Regarding 

the Board economists’ analysis of 2014 

HMDA data cited by a joint comment 

from consumer advocate and industry 

groups, the Bureau notes that the 

researchers ‘‘provide evidence in this 

note that lenders responded to the ATR 

and QM rules, particularly by favoring 

loans priced to obtain safe harbor 

protections,’’ but ‘‘the estimated 

magnitudes indicate the rules did not 

materially affect the mortgage market in 

2014.’’ 257 In response to commenters 

recommending that the Bureau increase 

the current 1.5-percentage-point safe 

harbor threshold to create a more level 

playing field between conventional and 

FHA lending, the Bureau reiterates that 

no evidence has been presented to 

suggest that the existing safe harbor 

threshold under the Bureau’s ATR/QM 

Rule has caused any significant 

disruption of access to responsible, 

affordable mortgage credit. Moreover, 

the Bureau is balancing access-to-credit 

concerns with concerns about ability to 

repay as measured by early delinquency 

rates. 

In declining to provide a conclusive 

(rather than a rebuttable) QM 

presumption of compliance for loans 

priced above the current 1.5-percentagepoint threshold, the Bureau concludes 

that such loans have higher delinquency 

rates and that access-to-credit concerns 

do not outweigh those ability to repay 

concerns.258 For example, Table 1 

shows for 2002–2008 loans a 12 percent 

early delinquency rate for loans priced 

1.50 to 1.74 percentage points above 

APOR, as compared to a 10 percent 

early delinquency rate for loans priced 

1.25 to 1.49 percentage points above 

APOR. The comparable early 

delinquency rates for 2018 loans from 

Table 2 also show a higher early 

delinquency rate for loans priced 1.50 to 

1.99 percentage points above APOR 

compared to loans priced 1.00 to 1.49 

percentage points above APOR: 2.7 

percent versus 1.7 percent. 

In response to comments 

recommending that the Bureau increase 

the safe harbor threshold to account for 

possible future rate spread widening in 

the market, including in response to 

FHFA’s GSE capital rule that was 

recently finalized and the additional 

loan-level price adjustment of 50 basis 

points on most Fannie Mae and Freddie 

Mac refinances, effective December 1, 

2020, the Bureau concludes that it 

would be premature to increase the safe 

harbor threshold based on possible 

future spread widening in the market. 

For example, as discussed by an 

industry commenter above, such 

changes may also affect APOR itself, 

which would cause uncertainty 

regarding the actual magnitude of any 

future changes to spreads over APOR. 

Moreover, while it is possible that 

future spread widening could result in 

some safe harbor QMs instead becoming 

rebuttable presumption QMs, the 

Bureau concludes there is insufficient 

evidence to suggest that shifts in QMs’ 

status from safe harbor to rebuttable 

presumption due to future spread 

widening would have a significant 

impact on access to responsible, 

affordable mortgage credit.259 However, 


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points above APOR, the transaction receives a 

rebuttable QM (rather than a conclusive QM) 

presumption of compliance with the ATR 

requirements. The Bureau concludes that a General 

QM eligibility threshold lower than 2.25 percentage 

points could unduly limit some consumers to nonQM or FHA loans with materially higher costs, or 

no responsible, affordable loan at all, given the 

current lack of a robust non-QM market. 260 78 FR 6408, 6513 (Jan. 30, 2013). 261 Id. at 6512–13. 

262 Id. at 6513. 

263 Id. at 6505. 

264 Id. at 6513. 

the Bureau will monitor the market and 

take action as needed to maintain the 

best balance between consumers’ ability 

to repay and access to responsible, 

affordable mortgage credit. 

As discussed above in part V.B.4, 

several commenters generally objected 

to a price-based approach, but the 

Bureau did not receive comments 

requesting a lower safe harbor threshold 

if the Bureau finalizes a price-based 

approach. In maintaining and not 

lowering the current 1.5 percentage 

point safe harbor threshold, the Bureau 

concludes that there is some uncertainty 

as to what the consequences would be 

for the market and consumers with 

loans that would be safe harbor QMs 

under the existing rule but rebuttable 

presumption QMs under a lower safe 

harbor threshold. Since it took effect, 

the Bureau’s ATR/QM Rule has 

provided a safe harbor to loans priced 

below the 1.5-percentage-point 

threshold—and such loans were never 

subject to the ability-to-repay 

requirements in the Board’s 2008 

HOEPA Final Rule. The 1.5-percentagepoint threshold in the Bureau’s ATR/ 

QM Rule is the same as that used in the 

Board’s 2008 HOEPA Final Rule. When 

the Bureau established the safe harbor 

in the January 2013 Final Rule, the 

Bureau stated that the ‘‘line the Bureau 

is drawing is one that has long been 

recognized as a rule of thumb to 

separate prime loans from subprime 

loans’’ and, ‘‘under the existing 

regulations that were adopted by the 

Board in 2008, only higher-priced 

mortgage loans are subject to an abilityto-repay requirement. . . .’’ 260 Thus, 

the January 2013 Final Rule stated that 

‘‘investors will likely require creditors 

to agree to . . . representations and 

warranties when assigning or selling 

loans under the [Bureau’s] new rule’’ 

and, for loans with rate spreads less 

than 1.5 percentage points, ‘‘this may 

represent an incremental risk of putback to creditors, given that such loans 

are not subject to the current [2008 

HOEPA Final Rule] regime, but those 

loans are being provided a safe harbor 

if they are qualified mortgages.’’ 261 In 

contrast, for loans with rate spreads of 

1.5 percentage points or more, the 

Bureau stated that ‘‘it is not clear that 

there is any incremental risk beyond 

that which exists today under the 

Board’s rule.’’ 262 The Bureau’s January 

2013 Final Rule further stated that there 

is ‘‘a widespread fear about the 

litigation risks associated with the 

Dodd-Frank Act ability-to-repay 

requirements,’’ 263 and that the safe 

harbor for loans with rate spreads less 

than 1.5 percentage points helps ensure 

that ‘‘litigation and secondary market 

impacts do not jeopardize access to 

credit.’’ 264 As discussed above, there is 

also concern among some commenters 

on the General QM Proposal regarding 

rebuttable presumption QMs presenting 

more litigation risk to creditors than safe 

harbor QMs. 

Based on the Bureau’s analysis of the 

2018 NMDB data, the Bureau expects 

that the early delinquency rate of loans 

obtaining safe harbor QM status under 

this final rule will be on par with loans 

obtaining safe harbor QM status under 

the current rule, which includes the 

Temporary GSE QM loan definition. 

Table 6 shows the early delinquency 

rate for 2018 NMDB first-lien purchase 

originations by rate spread and DTI 

ratio. For loans with rate spreads 

between 1 and 1.49 percentage points 

and DTI ratios above 43 percent, the 

early delinquency rate is 2.3 percent. 

These are loans that would not meet the 

current General QM loan definition due 

to the 43 percent DTI limit, but that 

would receive safe harbor General QM 

status under this final rule. If the 2018 

data are restricted to only those loans 

purchased and guaranteed by the GSEs 

(i.e., loans made under the Temporary 

GSE QM loan definition), loans with 

DTI ratios above 43 percent and rate 

spreads between 1 and 1.49 percentage 

points had an early delinquency rate of 

2.4 percent. 

The Bureau acknowledges that 

removing the 43 percent DTI limit will 

lead to somewhat higher-risk loans 

obtaining safe harbor QM status relative 

to loans within the current General QM 

loan definition (not including the 

Temporary GSE QM loan definition). In 

Table 5, the Bureau compared projected 

early delinquency rates for 2002–2008 

first-lien purchase originations under 

the General QM loan definition with 

and without a 43 percent DTI limit 

under a range of potential rate-spread 

based safe harbor thresholds. Under the 

current 43 percent DTI limit for firstlien General QMs, Table 5 indicates that 

early delinquency rates for loans with 

rate spreads just below 1.5 percentage 

points increase with DTI ratio, from 6 

percent for loans with a DTI ratio of 20 

percent or below to 11 percent for loans 

with DTI ratios from 41 to 43 percent. 

For loans with rate spreads just below 

1.5 percentage points and DTI ratios 

above 43 percent, Table 5 indicates 

early delinquency rates between 12 

percent (for loans with 44 to 45 percent 

DTI ratios) and 15 percent (for loans 

with DTI ratios of 61 to 70 percent). 

Therefore, the loans with DTI ratios 

above 43 percent that would be granted 

safe harbor status under the price-based 

approach at a safe harbor threshold of 

1.5 percentage points are likely to have 

a somewhat higher early delinquency 

rate than those just at or below 43 

percent DTI ratios, 12 to 15 percent 

versus 11 percent. The comparable early 

delinquency rates for 2018 loans from 

Table 6 also show a slightly higher early 

delinquency rate for loans with rate 

spreads just below 1.5 percentage points 

with DTI ratios above 43 percent 

compared to loans with DTI ratios of 36 

to 43 percent: 2.3 percent versus 1.5 

percent. However, as noted above, if the 

2018 data are restricted to loans made 

under the Temporary GSE QM loan 

definition, such loans with DTI ratios 

above 43 percent and rate spreads 

between 1 and 1.49 percentage points 

had an early delinquency rate of 2.4 

percent. Thus, the Bureau expects that 

the early delinquency rate of loans 

obtaining safe harbor QM status under 

this final rule will be on par with loans 

obtaining safe harbor QM status under 

the current rule, which includes the 

Temporary GSE QM loan definition. 

The Bureau concludes that the safe 

harbor threshold under this final rule 

strikes the best balance between abilityto-repay risk and the access-to-credit 

benefits discussed above and the overall 

safety of the prime QM market relative 

to the subprime market. As discussed by 

commenters above, loans that meet the 

General QM loan definition are 

relatively low-risk compared to loans 

with non-QM features. In response to 

commenters and based on findings in 

the Assessment Report, the Bureau 

concludes that loans with non-QM 

features—including interest-only loans, 

negative amortization loans, and loans 

made with limited or no documentation 

of the borrower’s income or assets—had 

a substantial negative effect on 

consumers’ ability to repay leading up 

to the 2008 financial crisis and 

subsequent passage of the Dodd-Frank 

Act. 

In maintaining and not lowering the 

current 1.5-percentage-point safe harbor 

threshold as part of this final rule, the 

Bureau also acknowledges that the 

January 2013 Final Rule relied in part 

on the 43 percent DTI limit to support 

its conclusion that a 1.5 percentageVerDate Sep<11>2014 23:27 Dec 28, 2020 Jkt 253001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\29DER3.SGM 29DER3

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265 78 FR 6408, 6511 (Jan. 30, 2013). 

266 Id. at 6528. The January 2013 Final Rule also 

did not include a DTI limit for balloon-payment 

QMs under § 1026.43(f). Id. at 6539. 

267See id. at 6511 (‘‘Moreover, requiring creditors 

to prove that they have satisfied the qualified 

mortgage requirements in order to invoke the 

presumption of compliance will itself ensure that 

the loans in question do not contain certain risky 

features and are underwritten with careful attention 

to consumers’ debt-to-income ratios.’’). 

268Subordinate-lien transactions are discussed 

below in the section-by-section analysis of 

§ 1026.43(e)(2)(vi). 

269However, as discussed in the section-bysection analysis of § 1026.43(e)(2)(vi) below, under 

the final rule a loan is not eligible for QM status 

(i.e., will not receive any presumption of 

compliance with the ATR requirements) under 

§ 1026.43(e)(2) if the loan exceeds the separate 

pricing thresholds in § 1026.43(e)(2)(vi), as 

finalized. 

point safe harbor threshold is 

appropriate. However, as discussed 

above, the 43 percent DTI limit was only 

one of several supporting factors listed 

in the January 2013 Final Rule.265

Moreover, the January 2013 Final Rule 

did not include a DTI limit for 

Temporary GSE QMs but nonetheless 

provided both those loans and General 

QMs with the same 1.5-percentage-point 

safe harbor threshold. The January 2013 

Final Rule stated that, ‘‘even in today’s 

credit-constrained market, 

approximately 22 percent of mortgage 

loans are made with a debt-to-income 

ratio that exceeds 43 percent’’ and 

‘‘many of those loans will fall within the 

temporary exception that the Bureau is 

recognizing for qualified mortgages.’’ 266

Further, as discussed in the section-bysection-analysis of § 1026.43(e)(2)(v)(A), 

this final rule imposes requirements for 

the creditor to consider the consumer’s 

DTI ratio or residual income, income or 

assets other than the value of the 

dwelling, and debts to satisfy the 

General QM loan definition, thus 

requiring that the creditor consider key 

aspects of the consumer’s financial 

capacity.267

With respect to General QM prime 

first-lien loans (General QM first-lien 

loans with an APR that does not exceed 

APOR by 1.5 or more percentage 

points), the Bureau concludes that it is 

appropriate to use its adjustment 

authority under TILA section 105(a) to 

retain a conclusive presumption (i.e., a 

safe harbor). The Bureau concludes this 

approach strikes the best balance 

between the competing consumer 

protection and access-to-credit 

considerations described above. The 

Bureau concludes these same 

considerations support not changing the 

current safe harbor threshold of 3.5 

percentage points for subordinate-lien 

transactions, which generally perform 

better and have stronger credit 

characteristics than first-lien 

transactions.268 The Bureau also 

concludes that providing a safe harbor 

for prime first-lien and subordinate-lien 

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. 

In addition, the Bureau also is also 

relying on TILA section 129C(b)(3)(B)(i), 

which authorizes the Bureau to 

prescribe regulations that revise, add to, 

or subtract from the criteria that define 

a QM, as authority for retaining a 

conclusive presumption. For the same 

reasons outlined above, the Bureau 

concludes that this conclusive 

presumption is 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, as 

well as necessary and appropriate to 

effectuate the purposes of TILA section 

129C and facilitate compliance with 

section 129C. 

The final rule generally maintains the 

current ATR/QM Rule’s rebuttable 

presumption of compliance for loans 

that exceed the safe harbor threshold 

but that otherwise meet the General QM 

requirements in § 1026.43(e)(2).269 The 

Bureau is not revising 

§ 1026.43(e)(1)(ii)(B), which defines the 

grounds on which the presumption of 

compliance that applies to higher-priced 

QMs can be rebutted. The Bureau did 

not receive comments regarding the 

grounds on which borrowers can rebut 

the presumption of compliance. The 

Bureau concludes that existing 

§ 1026.43(e)(1)(ii)(B) continues to strike 

the best balance between consumer 

protection and access to credit 

considerations and is sufficiently broad 

to provide consumers a reasonable 

opportunity to demonstrate that the 

creditor did not have a good faith and 

reasonable belief in the consumer’s 

repayment ability, despite meeting the 

prerequisites of a QM. 

VI. Section-by-Section Analysis 

1026.43 Minimum Standards for 

Transactions Secured by a Dwelling 

43(b) Definitions 

43(b)(4) 

Section 1026.43(b)(4) provides the 

definition of a higher-priced covered 

transaction. It provides that a covered 

transaction is a higher-priced covered 

transaction if the APR exceeds APOR for 

a comparable transaction as of the date 

the interest rate is set by the applicable 

rate spread specified in the ATR/QM 

Rule. For General QMs under 

§ 1026.43(e)(2), the applicable rate 

spreads are 1.5 or more percentage 

points for a first-lien covered 

transaction and 3.5 or more percentage 

points for a subordinate-lien covered 

transaction. Pursuant to § 1026.43(e)(1), 

a loan that satisfies the requirements of 

a QM and is a higher-priced covered 

transaction under § 1026.43(b)(4) is 

eligible for a rebuttable presumption of 

compliance with the ATR requirements. 

A QM that is not a higher-priced 

covered transaction is eligible for a 

conclusive presumption of compliance 

with the ATR requirements. 

The Bureau’s Proposal 

The Bureau proposed to revise 

§ 1026.43(b)(4) to create a special rule 

for purposes of determining whether 

certain types of General QMs under 

§ 1026.43(e)(2) are higher-priced 

covered transactions. Under the 

proposal, this special rule would have 

applied to loans for which the interest 

rate may or will change within the first 

five years after the date on which the 

first regular periodic payment will be 

due. For such loans, the creditor would 

have been required to determine the 

APR, for purposes of determining 

whether a General QM under 

§ 1026.43(e)(2) is a higher-priced 

covered transaction, by treating the 

maximum interest rate that may apply 

during that five-year period as the 

interest rate for the full term of the loan. 

Under the proposed rule, an identical 

special rule would have applied to loans 

for which the interest rate may or will 

change under proposed 

§ 1026.43(e)(2)(vi), which would have 

revised the definition of a General QM 

under § 1026.43(e)(2) to implement the 

price-based approach described in part 

V of this final rule. The proposed rule 

stated that the special rules in the 

proposed revisions to § 1026.43(b)(4) 

and § 1026.43(e)(2)(vi) would not 

modify other provisions in Regulation Z 

for determining the APR for other 

purposes, such as the disclosures 

addressed in or subject to the 

commentary to § 1026.17(c)(1). 

Proposed comment 43(b)(4)–4 stated 

that provisions in subpart C, including 

commentary to § 1026.17(c)(1), address 

how to determine the APR disclosures 

for closed-end credit transactions and 

that provisions in § 1026.32(a)(3) 

address how to determine the APR to 

determine coverage under 

§ 1026.32(a)(1)(i). It further provided 

that proposed § 1026.43(b)(4) required, 

only for purposes of a QM under 

paragraph (e)(2), a different 


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determination of the APR for purposes 

of paragraph (b)(4) for a loan for which 

the interest rate may or will change 

within the first five years after the date 

on which the first regular periodic 

payment will be due. It also crossreferenced proposed comment 

43(e)(2)(vi)–4 for how to determine the 

APR of such a loan for purposes of 

§ 1026.43(b)(4) and (e)(2)(vi). 

The Bureau sought comment on all 

aspects of the special rule it proposed in 

§ 1026.43(b)(4). 

The Final Rule 

The Bureau is finalizing 

§ 1026.43(b)(4) and comment 43(b)(4)–4 

as proposed. The section-by-section 

analysis of § 1026.43(e)(2)(vi), which the 

Bureau also is finalizing as proposed, 

explains the Bureau’s reasoning for 

adopting these provisions as proposed. 

That section-by-section analysis also 

summarizes comments received in 

response to the proposed special rule 

and provides the Bureau’s response to 

those comments. 

Legal authority. As discussed above in 

part IV, TILA section 105(a) directs the 

Bureau to prescribe regulations to carry 

out the purposes of TILA and provides 

that such regulations may contain 

additional requirements, classifications, 

differentiations, or other provisions, and 

may 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. In 

particular, it is the purpose of TILA 

section 129C, as amended by the DoddFrank Act, 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. 

As also discussed above in part IV, 

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 

available to consumers in a manner 

consistent with the purposes of section 

129C, necessary and appropriate to 

effectuate the purposes of section 129C 

and section 129B, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance with such section. 

The Bureau is finalizing the special 

rule in § 1026.43(b)(4) regarding the 

APR determination of certain loans for 

which the interest rate may or will 

change pursuant to its authority under 

TILA section 105(a) to make such 

adjustments and exceptions as are 

necessary and proper to effectuate the 

purposes of TILA, including that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans. The Bureau concludes that 

these provisions will ensure that 

General QM status will not be accorded 

to certain loans for which the interest 

rate may or will change that pose a 

heightened risk of becoming 

unaffordable relatively soon after 

consummation. The Bureau is also 

finalizing these provisions pursuant to 

its authority under TILA section 

129C(b)(3)(B)(i) to revise and add to the 

statutory language. The Bureau 

concludes that the special rule’s APR 

determination provisions in 

§ 1026.43(b)(4) will ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purpose of 

TILA section 129C, referenced above, as 

well as effectuate that purpose. 

43(c) Repayment Ability 

43(c)(4) Verification of Income or 

Assets 

TILA section 129C(a)(4) states that a 

creditor making a residential mortgage 

loan shall verify amounts of income or 

assets that such creditor relies on to 

determine repayment ability, including 

expected income or assets, by reviewing 

the consumer’s Internal Revenue 

Service (IRS) Form W–2, tax returns, 

payroll receipts, financial institution 

records, or other third-party documents 

that provide reasonably reliable 

evidence of the consumer’s income or 

assets. In the January 2013 Final Rule, 

the Bureau implemented this 

requirement in § 1026.43(c)(4), which 

states that a creditor must verify the 

amounts of income or assets that the 

creditor relies on under 

§ 1026.43(c)(2)(i) to determine a 

consumer’s ability to repay a covered 

transaction using third-party records 

that provide reasonably reliable 

evidence of the consumer’s income or 

assets. Section 1026.43(c)(4) further 

states that a creditor may verify the 

consumer’s income using a tax-return 

transcript issued by the IRS and lists 

several examples of other records the 

creditor may use to verify the 

consumer’s income or assets, including, 

among others, financial institution 

records. Additionally, current 

§ 1026.43(e)(2)(v)(A) provides that a 

General QM is a covered transaction for 

which the creditor considers and 

verifies at or before consummation 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 in accordance with 

§ 1026.43(c)(4), as well as 

§ 1026.43(c)(2)(i) and appendix Q. 

The Bureau proposed to add comment 

43(c)(4)–4 to clarify that a creditor does 

not meet the requirements of 

§ 1026.43(c)(4) if it observes an inflow of 

funds into the consumer’s account 

without confirming that the funds 

qualify as a consumer’s personal 

income. The proposed comment also 

stated that, for example, a creditor 

would not meet the requirements of 

§ 1026.43(c)(4) where it observes an 

unidentified $5,000 deposit in the 

consumer’s account but fails to take any 

measures to confirm or lacks any basis 

to conclude that the deposit represents 

the consumer’s personal income and 

not, for example, proceeds from the 

disbursement of a loan. The Bureau did 

not propose to change the text of 

§ 1026.43(c)(4). 

Commenters to the proposal did not 

address proposed comment 43(c)(4)–4. 

Accordingly, the Bureau is adopting 

new comment 43(c)(4)–4 as proposed. 

The Bureau determines, based on 

outreach and on its experience 

supervising creditors, that this 

clarification would be useful to 

creditors because the ATR/QM Rule 

includes ‘‘financial institution records’’ 

as one of the examples of records that 

a creditor may use to verify a 

consumer’s income or assets. As part of 

their underwriting process, creditors 

may seek to use transactions in 

electronic or paper financial records 

such as consumer account statements to 

examine inflows and outflows from 

consumers’ accounts. In many cases, 

there may be a sufficient basis in 

transaction data alone, or in 

combination with other information, to 

determine that a deposit or other credit 

to a consumer’s account is the 

consumer’s personal income, such that 

a creditor’s use of the data in an 

underwriting process is distinguishable 

from the example in the proposed 

comment, and, therefore, the creditor 

may use the data in verifying the 

consumer’s income. The Bureau also 

concludes that this clarification would 

help creditors understand their 

verification requirements under the 

General QM loan definition. Under this 

final rule, § 1026.43(e)(2)(v)(B) provides 

that, to satisfy the General QM loan 

definition, the creditor must verify the 

consumer’s current or reasonably 

expected income or assets using thirdparty records that provide reasonably 

reliable evidence of the consumer’s 

income or assets, in accordance with 

§ 1026.43(c)(4). 


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The Bureau is adding comment 

43(c)(4)–4 pursuant to TILA section 

129C(a)(4), which states that a creditor 

making a residential mortgage loan shall 

verify amounts of income or assets that 

such creditor relies on to determine 

repayment ability, including expected 

income or assets, by reviewing the 

consumer’s IRS Form W–2, tax returns, 

payroll receipts, financial institution 

records, or other third-party documents 

that provide reasonably reliable 

evidence of the consumer’s income or 

assets. 

43(e) Qualified Mortgages 

43(e)(2) Qualified Mortgage Defined— 

General 

43(e)(2)(v) 

As discussed above in part V, this 

final rule removes the specific DTI limit 

in § 1026.43(e)(2)(vi). Furthermore, as 

discussed below in this section-bysection analysis, this final rule requires 

that creditors consider the consumer’s 

DTI ratio or residual income and 

removes the appendix Q requirements 

from § 1026.43(e)(2)(v). The Bureau 

concludes that these amendments 

necessitate additional revisions to the 

General QM loan definition to clarify a 

creditor’s obligation to consider and 

verify certain information for purposes 

of the General QM loan definition. 

Consequently, this final rule amends the 

consider and verify requirements in 

§ 1026.43(e)(2)(v) and its associated 

commentary. 

TILA section 129C contains several 

requirements that creditors consider and 

verify various types of information. In 

the statute’s general ATR provisions, 

TILA section 129C(a)(1) requires that a 

creditor make a reasonable and good 

faith determination, based on ‘‘verified 

and documented information,’’ that a 

consumer has a reasonable ability to 

repay the loan. TILA section 129C(a)(3) 

states that a creditor’s ATR 

determination shall include 

‘‘consideration’’ of the consumer’s 

credit history, current income, expected 

income the consumer is reasonably 

assured of receiving, current obligations, 

DTI ratio or the residual income the 

consumer will have after paying nonmortgage debt and mortgage-related 

obligations, employment status, and 

other financial resources other than the 

consumer’s equity in the dwelling or 

real property that secures repayment of 

the loan. TILA section 129C(a)(4) states 

that a creditor making a residential 

mortgage loan shall verify amounts of 

income or assets that such creditor 

relies on to determine repayment 

ability, including expected income or 

assets, by reviewing the consumer’s IRS 

Form W–2, tax returns, payroll receipts, 

financial institution records, or other 

third-party documents that provide 

reasonably reliable evidence of the 

consumer’s income or assets. Finally, in 

the statutory QM definition, TILA 

section 129C(b)(2)(A)(iii) provides that, 

for a loan to be a QM, the income and 

financial resources relied on to qualify 

the obligors on the loan must be 

‘‘verified and documented.’’ 

In the January 2013 Final Rule, the 

Bureau implemented the requirements 

to consider and verify various factors for 

the general ATR standard in 

§ 1026.43(c)(2), (3), (4), and (7). Section 

1026.43(c)(2) states that—except as 

provided in certain other provisions 

(including the General QM loan 

definition)—a creditor must consider 

several specified factors in making its 

ATR determination. These factors 

include, among others, 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 (under § 1026.43(c)(2)(i)); the 

consumer’s current debt obligations, 

alimony, and child support 

(§ 1026.43(c)(2)(vi)); and the consumer’s 

monthly DTI ratio or residual income in 

accordance with § 1026.43(c)(7). Section 

1026.43(c)(3) requires a creditor to 

verify the information the creditor relies 

on in determining a consumer’s 

repayment ability using reasonably 

reliable third-party records, with a few 

specified exceptions. Section 

1026.43(c)(3) further states that a 

creditor must verify a consumer’s 

income and assets that the creditor 

relies on in accordance with 

§ 1026.43(c)(4). Section 1026.43(c)(4) 

requires that a creditor verify the 

amounts of income or assets that the 

creditor relies on to determine a 

consumer’s ability to repay a covered 

transaction using third-party records 

that provide reasonably reliable 

evidence of the consumer’s income or 

assets. It also provides examples of 

records the creditor may use to verify 

the consumer’s income or assets. 

As noted in part V, the January 2013 

Final Rule incorporated some aspects of 

the general ATR standards into the 

General QM loan definition, including 

the requirement to consider and verify 

income or assets and debt obligations, 

alimony, and child support. Section 

1026.43(e)(2)(v) states that a General 

QM is a covered transaction for which 

the creditor considers and verifies at or 

before consummation: (A) 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, in accordance 

with appendix Q, § 1026.43(c)(2)(i), and 

(c)(4); and (B) the consumer’s current 

debt obligations, alimony, and child 

support in accordance with appendix Q 

and § 1026.43(c)(2)(vi) and (c)(3). The 

Bureau used its adjustment and 

exception authority under TILA section 

129C(b)(3)(B)(i) to require creditors to 

consider and verify the consumer’s debt 

obligations, alimony, and child support 

pursuant to the General QM loan 

definition. 

The Bureau proposed to revise 

§ 1026.43(e)(2)(v) to separate and clarify 

the requirements to consider and verify 

certain information for purposes of the 

General QM loan definition. Proposed 

§ 1026.43(e)(2)(v)(A) contained the 

‘‘consider’’ requirements and proposed 

§ 1026.43(e)(2)(v)(B) contained the 

‘‘verify’’ requirements. Specifically, 

proposed § 1026.43(e)(2)(v) stated that a 

General QM is a covered transaction for 

which the creditor: (A) Considers the 

consumer’s income or assets, debt 

obligations, alimony, child support, and 

monthly DTI ratio or residual income, 

using the amounts determined from 

§ 1026.43(e)(2)(v)(B); and (B) verifies 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 using third-party 

records that provide reasonably reliable 

evidence of the consumer’s income or 

assets, in accordance with 

§ 1026.43(c)(4), and the consumer’s 

current debt obligations, alimony, and 

child support using reasonably reliable 

third-party records in accordance with 

§ 1026.43(c)(3). Proposed 

§ 1026.43(e)(2)(v)(A) also stated that, for 

purposes of § 1026.43(e)(2)(v)(A), the 

consumer’s monthly DTI ratio or 

residual income is determined in 

accordance with § 1026.43(c)(7), except 

that the consumer’s monthly payment 

on the covered transaction, including 

the monthly payment for mortgagerelated obligations, is calculated in 

accordance with § 1026.43(e)(2)(iv). To 

further clarify the requirements in 

§ 1026.43(e)(2)(v), the Bureau also 

proposed to add comments 

43(e)(2)(v)(A)–1 through –3 and 

comments 43(e)(2)(v)(B)–1 through –3. 

As discussed below, this final rule 

adopts § 1026.43(e)(2)(v)(A) largely as 

proposed—with minor technical 

additions to the rule text—and adopts 

§ 1026.43(e)(2)(v)(B) as proposed. The 

Bureau is also adopting the proposed 

commentary for § 1026.43(e)(2)(v)(A) 

and § 1026.43(e)(2)(v)(B) largely as 

proposed, with two substantive changes 

from the proposal. First, the Bureau has 

added language to comment 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86349 

43(e)(2)(v)(A)–1 to clarify that, in order 

to meet the General QM consider 

requirement, a creditor must maintain 

written policies and procedures for how 

it takes into account income, debt, and 

DTI or residual income and document 

how it took into account these factors. 

Second, the Bureau has added a list of 

specific verification standards to 

comment 43(e)(2)(v)(B)–3.i, which 

provides a safe harbor for compliance 

with the verification requirement in 

§ 1026.43(e)(2)(v)(B). These verification 

standards include relevant provisions in 

specified versions of the Fannie Mae 

Single Family Selling Guide, the 

Freddie Mac Single-Family Seller/ 

Servicer Guide, the FHA’s Single Family 

Housing Policy Handbook, the VA’s 

Lenders Handbook, and the USDA’s 

Field Office Handbook for the Direct 

Single Family Housing Program and 

Handbook for the Single Family 

Guaranteed Loan Program, current as of 

the date of the proposal’s public release. 

The Bureau also proposed to remove 

comments 43(e)(2)(v)–2 and –3. In 

general, these comments explain that a 

creditor must consider and verify any 

income and debt specified in appendix 

Q, and that while a creditor may 

consider and verify any other income 

and debt, such income and debt would 

not be included in the DTI ratio 

determination required by 

§ 1026.43(e)(2)(vi). This final rule 

removes these comments. The Bureau 

concludes that these comments are no 

longer needed due to this final rule’s 

revisions to § 1026.43(e)(2)(v). The first 

sentence of each of these comments 

merely restates language in the 

regulatory text. The second sentence of 

each of these comments is no longer 

needed because this final rule removes 

references to appendix Q from 

§ 1026.43(e)(2)(v). And the third 

sentence of each of these comments is 

no longer needed because this final rule 

removes the DTI limit in 

§ 1026.43(e)(2)(vi). 

43(e)(2)(v)(A) 

The Bureau’s Proposal 

Section 1026.43(e)(2)(v) currently 

provides that a General QM is a covered 

transaction for which the creditor, at or 

before consummation, considers and 

verifies 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, debt 

obligations, alimony, and child support. 

In the General QM Proposal, the Bureau 

proposed to separate the consider and 

verify requirements in § 1026.43(e)(2)(v) 

into § 1026.43(e)(2)(v)(A) for the 

‘‘consider’’ requirements and 

§ 1026.43(e)(2)(v)(B) for the ‘‘verify’’ 

requirements. The Bureau proposed to 

revise § 1026.43(e)(2)(v)(A) to provide 

that a General QM is a covered 

transaction for which the creditor, at or 

before consummation, considers the 

consumer’s income or assets, debt 

obligations, alimony, child support, and 

monthly DTI ratio or residual income, 

using the amounts determined from 

proposed § 1026.43(e)(2)(v)(B). Proposed 

§ 1026.43(e)(2)(v)(A) also stated that, for 

purposes of § 1026.43(e)(2)(v)(A), the 

consumer’s monthly DTI ratio or 

residual income is determined in 

accordance with § 1026.43(c)(7), except 

that the consumer’s monthly payment 

on the covered transaction, including 

the monthly payment for mortgagerelated obligations, is calculated in 

accordance with § 1026.43(e)(2)(iv). 

To clarify the consider requirement in 

proposed § 1026.43(e)(2)(v)(A), the 

Bureau proposed to add comments 

43(e)(2)(v)(A)–1 to –3. Proposed 

comment 43(e)(2)(v)(A)–1 provided that, 

in order to comply with the consider 

requirement, a creditor must take into 

account income or assets, debt 

obligations, alimony, child support, and 

monthly DTI ratio or residual income in 

its ability-to-repay determination. The 

proposed comment further stated that, 

pursuant to requirements in § 1026.25(a) 

to retain records showing compliance 

with the rule, a creditor must retain 

documentation showing how it took 

into account the required factors. The 

proposed comment provided examples 

of the types of documents that a creditor 

might use to show that it took into 

account the required factors. 

The Bureau proposed comment 

43(e)(2)(v)(A)–2 to clarify that creditors 

have flexibility in how they consider 

these factors and that the proposed rule 

would not have prescribed a specific 

monthly DTI or residual income 

threshold. The proposed comment also 

included two examples of how a 

creditor may comply with the 

requirement to consider DTI. 

The Bureau proposed comment 

43(e)(2)(v)(A)–3 to clarify that the 

requirement in § 1026.43(e)(2)(v)(A) to 

consider income or assets, debt 

obligations, alimony, child support, and 

monthly DTI or residual income would 

not preclude the creditor from taking 

into account additional factors that are 

relevant in making its ability-to-repay 

determination. 

This final rule adopts 

§ 1026.43(e)(2)(v)(A) largely as 

proposed, with minor technical 

additions to the rule text. This final rule 

also adopts comments 43(e)(2)(v)(A)–1 

to –3 largely as proposed, with some 

adjustments in comment 43(e)(2)(v)(A)– 

1 to clarify that creditors must maintain 

certain policies and procedures and 

retain certain documentation to satisfy 

§ 1026.43(e)(2)(v)(A). 

Comments Received 

The Bureau’s general approach to the 

consider requirement. Both industry and 

consumer advocate commenters 

supported the proposal to retain a 

requirement to consider income or 

assets, debt obligations, alimony, child 

support, and monthly DTI or residual 

income for General QMs. Commenters 

generally stated that the consider 

requirement is an important consumer 

protection for QMs and that such a 

requirement is necessary to achieve the 

statutory intent of TILA. Both industry 

and consumer advocate commenters 

generally supported the retention of a 

requirement to consider a consumer’s 

monthly DTI ratio and the option of 

considering residual income in lieu of 

DTI. These commenters explained that 

DTI is an important factor in assessing 

a consumer’s ability to repay and that 

the residual income option creates space 

for flexibility and industry innovation. 

One industry commenter noted that 

creditors use DTI as part of their 

underwriting processes and will 

continue to do so even if the General 

QM loan definition no longer includes 

a specific DTI limit. Another industry 

commenter explained that it uses DTI as 

part of its underwriting process and 

makes responsible loans with DTI ratios 

above 43 percent. Another industry 

commenter stated that the VA loan 

program has successfully used residual 

income for underwriting purposes. 

One industry commenter expressed 

concerns about the requirement to 

calculate DTI according to 

§ 1026.43(c)(7), arguing that this crossreference could be interpreted to import 

a requirement that creditors adopt an 

‘‘appropriate’’ DTI threshold. The 

commenter suggested that the Bureau 

could avoid that interpretation by 

removing any requirement to calculate a 

DTI ratio. As explained in the proposed 

rule and below, the General QM 

Proposal incorporated the crossreference only for purposes of 

calculating monthly DTI, residual 

income, and monthly payment on the 

covered loan. 

Commentary provisions. Industry 

commenters generally supported the 

inclusion of proposed comments 

43(e)(2)(v)(A)–1 through –3. These 

commenters generally stated that the 

proposed comments provide the clarity 

needed to facilitate industry compliance 

and assurance of QM status. Many 

industry commenters specifically 


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86350 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

encouraged the Bureau to adopt the 

proposed comments because they would 

provide creditors with flexibility in 

applying their own underwriting 

methodologies. One industry 

commenter stated that the examples in 

the proposed comments reflected the 

current underwriting practices of 

community banks. 

Many industry commenters supported 

the proposed documentation approach 

to the consider requirement. One 

industry commenter explained that the 

proposed documentation approach 

would be an effective means for a 

creditor to meet the consider 

requirement and have assurance of QM 

status. A comment letter signed by 12 

civil rights and consumer groups 

included a ‘‘term sheet’’ that provided a 

variety of suggested changes to the 

consider requirement (‘‘joint consumer 

advocate term sheet’’) and asked the 

Bureau to clearly state that in order to 

maintain QM status, the creditor must 

retain documentation of how it satisfied 

the consider requirement. A consumer 

advocate commenter that also signed the 

term sheet explained that, without 

documentation, examiners could not 

meaningfully assess whether the 

creditor had in fact considered the 

consumer’s debts and income. An 

industry commenter asked the Bureau to 

adopt a cure provision for situations 

where a loan file is incomplete due to 

an alleged oversight. 

Several commenters recommended 

that the Bureau expressly require 

creditors to develop and maintain 

procedures to consider debts and 

income. In its support for the 

documentation examples in the first 

proposed comment, one industry 

commenter suggested that the Bureau 

require creditors to provide underwriter 

spreadsheets or other documentation 

that showed the creditor followed 

procedures in its consideration of the 

required factors. Another industry 

commenter recommended that the 

Bureau require creditors to maintain an 

independently developed credit policy 

setting forth the manner in which they 

will consider and verify the required 

factors. The commenter stated that such 

a requirement would facilitate investor 

and regulator evaluation of a loan’s QM 

status and would align with OCC 

guidance and appraiser guidance under 

the Financial Institutions Reform, 

Recovery, and Enforcement Act. 

Another industry commenter asked the 

Bureau to develop specific operational 

guidelines for the calculation of DTI and 

residual income, including minimum 

threshold values for residual income. 

Another industry commenter stated that 

the Bureau should require creditors to 

comply with a specific set of 

underwriting criteria that includes 

compensating factors for consumers 

with high DTI. 

Similar to these industry commenters, 

consumer advocate commenters asked 

the Bureau to require creditors to 

develop and maintain procedures to 

consider debts and income. One 

consumer advocate commenter that 

signed the joint consumer advocate term 

sheet explained that, without a 

component requiring such procedures, 

the consider requirement would exist in 

name only and individual loan officers 

could make individual decisions about 

what meets the consider standard. This 

commenter explained that without 

procedures, creditors under pressure to 

make loans could use their discretion to 

make a pro forma note of consideration. 

Some industry commenters 

specifically encouraged the Bureau to 

adopt the language in proposed 

comment 43(e)(2)(v)(A)–2 explaining 

that the proposed rule would not 

prescribe a particular DTI or residual 

income threshold. One industry 

commenter stated that it appreciated 

how the proposed comments provided 

creditors with flexibility as to how they 

considered monthly DTI and additional 

factors in their underwriting processes. 

One industry commenter asked the 

Bureau to refrain from enumerating 

appropriate compensating factors. In 

contrast, some industry commenters 

stated that the proposed consider 

requirement was still too vague and 

requested additional clarification. One 

of these commenters warned that riskaverse lenders would not originate loans 

under the proposed approach. 

One industry commenter supported 

the consider requirement but requested 

that the Bureau require a creditor to 

show that it took into account the 

required factors, rather than how it took 

into account the required factors. 

Several industry and consumer 

advocate commenters supported the 

Bureau’s statement in the proposal that 

if creditors ignore income or assets, debt 

obligations, alimony, child support, and 

DTI or residual income, they do not 

consider these factors sufficiently for 

purposes of the General QM loan 

definition. 

Both industry and consumer advocate 

commenters raised concerns that the 

proposed General QM consider 

standard, even with the proposed 

clarifying commentary, would not 

prevent loans from obtaining QM status 

if the consumer lacks the ability to 

repay. One consumer advocate 

commenter stated that the proposed 

General QM consider standard needs 

more specificity to ensure that creditors 

engage in a meaningful ability-to-repay 

analysis. The joint consumer advocate 

term sheet provided a variety of 

suggested changes to the consider 

requirement, such as adding extreme 

examples of non-compliance (100 

percent DTI or zero or negative residual 

income loans); deeming LTV-based 

loans to be a per se violation of the 

consider requirement; clarifying that not 

retaining documentation of how the 

creditor considered the required factors 

would result in loss of QM status; and 

expanding the documentation 

requirement so that an examiner could 

confirm that a creditor followed its 

procedures. Another consumer advocate 

commenter that signed the joint 

consumer advocate term sheet stated 

that examples of non-compliant 

underwriting practices would provide 

some clarity to consumers and industry; 

establish an outer bound for responsible 

mortgage lending; and ensure that 

lenders adopt systems that would 

prevent behavior that falls outside the 

scope of a reasonable consideration of 

the required factors. This consumer 

advocate commenter stated that the joint 

consumer advocate term sheet’s 

recommendation to clearly exclude 

loans where the creditor relied on LTV 

ratio in lieu of debt, income, and DTI or 

residual income would prevent loan 

flipping practices, which rely on the 

consumer’s existing equity in the home 

to repeatedly refinance and strip equity 

in order to pay financed closing costs 

immediately to the creditor or broker. In 

contrast, one industry commenter stated 

that LTV-based lending should not be a 

concern given the fixed cost of 

foreclosure and how a creditor 

determines loan pricing. One industry 

commenter stated that a loan with 100 

percent DTI could meet the proposed 

General QM consider standard. 

The Final Rule 

This final rule adopts 

§ 1026.43(e)(2)(v)(A) and comments 

43(e)(2)(v)(A)–1 to –3 largely as 

proposed, with minor technical 

additions to the rule text and some 

adjustments in comment 43(e)(2)(v)(A)– 

1 to clarify that creditors must maintain 

certain policies and procedures and 

retain certain documentation. As 

explained above, the Bureau is 

separating the consider and verify 

requirements in § 1026.43(e)(2)(v) into 

§ 1026.43(e)(2)(v)(A) for the ‘‘consider’’ 

requirements and § 1026.43(e)(2)(v)(B) 

for the ‘‘verify’’ requirements. Final 

§ 1026.43(e)(2)(v)(A) provides that a 

General QM is a covered transaction for 

which the creditor, at or before 

consummation, considers the 

consumer’s current or reasonably 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86351 

270 78 FR 35430 (June 12, 2013). 

271 Id. at 35487 (‘‘The Bureau continues to believe 

that consideration of debt-to-income ratio or 

residual income is fundamental to any 

determination of ability to repay. A consumer is 

able to repay a loan if he or she has sufficient funds 

to pay his or her other obligations and expenses and 

still make the payments required by the terms of the 

loan. Arithmetically comparing the funds to which 

a consumer has recourse with the amount of those 

funds the consumer has already committed to 

spend or is committing to spend in the future is 

necessary to determine whether sufficient funds 

exist.’’). 

272 78 FR 6408, 6528 (Jan. 30, 2013) 

(‘‘Unfortunately, however, the Bureau lacks 

sufficient data, among other considerations, to 

mandate a bright-line rule based on residual income 

at this time.’’). 

273 Id. at 6527 (‘‘Another consumer group 

commenter argued that residual income should be 

incorporated into the definition of QM. Several 

commenters suggested that the Bureau use the 

general residual income standards of the VA as a 

model for a residual income test, and one of these 

commenters recommended that the Bureau 

coordinate with FHFA to evaluate the experiences 

of the GSEs in using residual income in 

determining a consumer’s ability to repay.’’); id. at 

6528 (‘‘Finally, the Bureau acknowledges arguments 

that residual income may be a better measure of 

repayment ability in the long run. A consumer with 

a relatively low household income may not be able 

to afford a 43 percent debt-to-income ratio because 

the remaining income, in absolute dollar terms, is 

too small to enable the consumer to cover his or her 

living expenses. Conversely, a consumer with a 

relatively high household income may be able to 

afford a higher debt ratio and still live comfortably 

on what is left over.’’). 

expected income or assets other than the 

value of the dwelling (including any 

real property attached to the dwelling) 

that secures the loan, debt obligations, 

alimony, child support, and monthly 

DTI ratio or residual income, using the 

amounts determined from 

§ 1026.43(e)(2)(v)(B). Although the 

proposed consider provision would 

have required creditors to consider 

current or reasonably expected income 

or assets other than the value of the 

dwelling through the requirement to use 

amounts determined from the 

§ 1026.43(e)(2)(v)(B), the final rule 

makes this connection more clear by 

including the clauses ‘‘current or 

reasonably expected’’ and ‘‘other than 

the value of the dwelling (including any 

real property attached to the dwelling) 

that secures the loan’’ in 

§ 1026.43(e)(2)(v)(A). Final 

§ 1026.43(e)(2)(v)(A) also states that, for 

purposes of § 1026.43(e)(2)(v)(A), the 

consumer’s monthly DTI ratio or 

residual income is determined in 

accordance with § 1026.43(c)(7), except 

that the consumer’s monthly payment 

on the covered transaction, including 

the monthly payment for mortgagerelated obligations, is calculated in 

accordance with § 1026.43(e)(2)(iv). 

The Bureau’s general approach to the 

consider requirement. The Bureau 

concludes that requiring creditors to 

consider DTI as part of the General QM 

loan definition ensures that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

The Bureau determines that DTI 

continues to be an important factor in 

assessing a consumer’s ability to repay. 

Comments on the General QM Proposal 

and on the ANPR indicate that creditors 

generally use DTI as part of their 

underwriting process. These comments 

indicate that requiring as part of the 

General QM loan definition that 

creditors consider DTI when 

determining a consumer’s ability to 

repay—even if the General QM loan 

definition no longer includes a specific 

DTI limit—is consistent with current 

market practices. 

As discussed in the June 2013 Final 

Rule, the Bureau created an exception 

from the DTI limit for certain small 

creditors that hold QMs on portfolio.270

The Bureau determined that, even 

though the DTI limit was not 

appropriate for a small creditor that 

holds loans on their portfolio, DTI (or 

residual income, as discussed below) 

was still a fundamental part of the 

creditor’s ability-to-repay 

determination.271 The Bureau similarly 

concludes that DTI is a fundamental 

part of the creditor’s ability-to-repay 

determination for General QMs. 

Section 1026.43(e)(2)(v)(A) provides 

creditors with the option to consider 

either a consumer’s monthly residual 

income or DTI. The Bureau concludes 

that residual income is an appropriate 

alternative to monthly DTI for creditors 

to consider under § 1026.43(e)(2)(v). The 

January 2013 Final Rule adopted a 

bright-line DTI limit for the General QM 

loan definition under § 1026.43(e)(2)(vi), 

but the Bureau concluded that it did not 

have enough information to establish a 

bright-line residual income limit as an 

alternative to the DTI limit.272 In 

comparison, consistent with TILA 

section 129C(a)(3), the January 2013 

Final Rule allows creditors to consider 

either residual income or DTI as part of 

the general ATR requirements in 

§ 1026.43(c)(2)(vii), and the June 2013 

Final Rule allows small creditors 

originating QMs pursuant to 

§ 1026.43(e)(5) to consider DTI or 

residual income. Given the elimination 

of the bright-line DTI limit in 

§ 1026.43(e)(2)(vi), comments on the 

proposed rule, comments from 

stakeholders in the January 2013 Final 

Rule regarding the value of residual 

income in determining ability to 

repay,273 and the Bureau’s 

determination in the June 2013 Final 

Rule that residual income can be a 

valuable measure of ability to repay, the 

Bureau concludes that allowing 

creditors the option to consider residual 

income in lieu of DTI would allow for 

creditor flexibility and innovation and 

is necessary and proper to preserve 

access to responsible, affordable 

mortgage credit. 

The Bureau concludes that the 

amounts considered under 

§ 1026.43(e)(2)(v)(A) should be 

consistent with the amounts verified 

according to § 1026.43(e)(2)(v)(B). For 

example, if the creditor seeks to comply 

with the consider requirement under 

§ 1026.43(e)(2)(v)(A) using the 

consumer’s assets, the creditor could 

consider assets other than the value of 

the dwelling (including any real 

property attached to the dwelling) that 

secures the loan as those assets are 

calculated under § 1026.43(e)(2)(v)(B). 

The final rule also adopts the 

proposed requirement in 

§ 1026.43(e)(2)(v)(A) to calculate 

monthly DTI, monthly residual income, 

and monthly payment for mortgagerelated obligations in a manner 

consistent with the method used in 

current § 1026.43(e)(2)(vi). As explained 

in the proposed rule, this calculation 

method was previously adopted in the 

January 2013 Final Rule and is being 

moved to the § 1026.43(e)(2)(v)(A) 

consider requirement given the Bureau’s 

removal of the DTI limit in 

§ 1026.43(e)(2)(vi) and appendix Q. To 

preserve the incorporation of alimony 

and child support that was previously 

facilitated by appendix Q, the 

calculation method in 

§ 1026.43(e)(2)(v)(A) now crossreferences § 1026.43(c)(7) for purposes 

of calculating monthly DTI or residual 

income. The Bureau concludes that 

incorporating the pre-existing reference 

to simultaneous loans is no longer 

necessary because the new crossreference to § 1026.43(c)(7) requires 

creditors to consider simultaneous 

loans. Additionally, given that this final 

rule allows creditors to consider 

residual income in lieu of monthly DTI, 

the Bureau is expanding the calculation 

method requirement to include residual 

income. This calculation method also 

incorporates the pre-existing crossreference to § 1026.43(e)(2)(iv) to 

determine the monthly payments for the 

covered loan. 

As explained in the proposed rule, 

this calculation method was previously 

adopted in the January 2013 Final Rule. 

This calculation method does not 

appear to be unduly burdensome given 

that, as described further below, only 

one commenter addressed the proposed 

calculation provision, and the comment 


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86352 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

related not to the calculation method 

itself but to the commenter’s concern 

that cross-referencing § 1026.43(c)(7) 

could be interpreted to import a 

requirement that creditors adopt an 

‘‘appropriate’’ DTI threshold. The 

Bureau also believes that providing a 

calculation method will facilitate 

compliance and decrease creditor 

compliance costs by reducing ambiguity 

as to how DTI must be calculated. 

Accordingly, the Bureau concludes that 

the information in the rulemaking 

record does not support amending the 

rule to delete or change the calculation 

method. The Bureau also notes that the 

requirement merely provides the 

method for calculating DTI, residual 

income, and monthly mortgage 

payments. As detailed in comments 

43(e)(2)(v)(A)–2 to –3, General QM 

creditors still retain the flexibility to 

determine how the required factors are 

taken into account in the consumer’s 

ATR determination. 

The Bureau declines to remove the 

requirement to calculate and consider 

DTI (or residual income) according to 

§ 1026.43(c)(7) in order to address the 

industry commenter’s concern that this 

could be interpreted to import a 

requirement that creditors adopt an 

‘‘appropriate’’ DTI threshold. Instead, as 

explained in the proposed rule and 

above, the Bureau emphasizes that this 

final rule incorporates the crossreference only for purposes of 

calculating monthly DTI, residual 

income, and monthly payment on the 

covered loan. As comment 

43(e)(2)(v)(A)–2 makes clear, creditors 

have flexibility in how they consider 

income or assets, debt obligations, 

alimony, child support, and monthly 

DTI ratio or residual income and the 

final rule does not prescribe a specific 

monthly DTI or residual income 

threshold. More generally, the Bureau 

emphasizes that § 1026.43(e)(2)(v)(A) 

requires only that the creditor 

‘‘consider’’ the specified factors. It does 

not permit a broader challenge that a 

loan is not a General QM because the 

creditor failed to make a reasonable and 

good-faith determination of the 

consumer’s ability to repay under 

§ 1026.43(c)(1), as this would 

undermine the certainty of whether a 

loan is a General QM. 

Commentary provisions. For the 

reasons discussed below, the Bureau is 

finalizing comments 43(e)(2)(v)(A)–1 to 

–3 largely as proposed, with some 

adjustments in comment 43(e)(2)(v)(A)– 

1 to clarify that creditors must maintain 

certain policies and procedures and 

must retain certain documentation. 

This final rule adds comments 

43(e)(2)(v)(A)–1 to –3 because the 

Bureau concludes they are appropriate 

to ensure that the Rule’s requirement to 

consider the consumer’s income or 

assets, debt obligations, alimony, child 

support, and DTI or residual income is 

clear and detailed enough to provide 

creditors with sufficient certainty about 

whether a loan satisfies the General QM 

loan definition. Under the final rule, the 

General QM loan definition no longer 

includes a specific DTI limit in 

§ 1026.43(e)(2)(vi) and instead requires 

in § 1026.43(e)(2)(v)(A) that creditors 

consider the consumer’s income or 

assets, debt obligations, alimony, child 

support, and DTI or residual income . 

By requiring creditors to calculate DTI 

and compare that calculation to a DTI 

limit, the DTI limit from the January 

2013 Final Rule provided creditors with 

a bright-line rule demonstrating how to 

consider the consumer’s income or 

assets and debts for purposes of 

determining whether the General QM 

loan requirements are met. Without 

additional explanation of the 

requirement to consider DTI or residual 

income, along with the consumer’s 

income or assets and debts, elimination 

of the DTI limit could create compliance 

uncertainty that could leave some 

creditors reluctant to originate QMs to 

consumers and could allow other 

creditors to originate risky loans 

without considering DTI or residual 

income and still receive QM status. In 

addition, without additional 

explanation, it may be difficult to 

enforce the requirement to consider. 

Commentary examples of compliance 

that reflect standard market practices 

also may help ensure that the consider 

requirement is not unduly burdensome. 

Many commenters supported the 

Bureau’s proposal to maintain the 

consider requirement in the General QM 

loan definition, while also emphasizing 

the importance of clarity of QM safe 

harbor status and the utility of 

compliance examples. While 

commenters generally supported 

inclusion of the proposed comments, 

some commenters requested additions 

such as clarification of the 

documentation requirement and 

examples of non-compliance. 

Accordingly, the Bureau concludes that 

it is appropriate to provide additional 

explanation for the § 1026.43(e)(2)(v) 

consider requirement in comments 

43(e)(2)(v)(A)–1 to –3, as discussed 

below. 

Comment 43(e)(2)(v)(A)–1. Consistent 

with the proposal, comment 

43(e)(2)(v)(A)–1 explains that, in order 

to comply with the requirement to 

consider, a creditor must take into 

account 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, debt obligations, 

alimony, child support, and monthly 

DTI ratio or residual income in its 

ability-to-repay determination. As 

adopted by this final rule, comment 

43(e)(2)(v)(A)–1 also provides that a 

creditor must maintain written policies 

and procedures for how it takes into 

account, pursuant to its underwriting 

standards, income or assets, debt 

obligations, alimony, child support, and 

monthly debt-to-income ratio or 

residual income in its ability-to-repay 

determination. The Bureau is also 

adding a clause to comment 

43(e)(2)(v)(A)–1 to explain that the 

creditor must document how it applied 

its policies and procedures. The Bureau 

is also clarifying the documentation 

example to reflect how the creditor may 

also comply by providing the required 

documents in combination with any 

applicable exceptions used from the 

creditor’s policies and procedures. 

Bureau experience in market outreach 

and regulation shows that it is standard 

practice for creditors to maintain 

written policies and procedures, 

including underwriting standards, for 

considering debt, income, and DTI or 

residual income, and commenters 

representing creditors explained that 

their members already have 

underwriting procedures to take into 

account DTI in the ability-to-repay 

determination. The creditor’s policies 

and procedures typically refer to the 

creditor’s underwriting standards and 

describe how to address exceptions to 

the creditor’s underwriting standards. 

The Bureau concludes that this 

policies and procedures clarification 

will facilitate confirmation by investors, 

auditors, consumers, regulators, and 

other stakeholders that a creditor has, in 

fact, taken into account the required 

factors. The Bureau determines that, as 

some commenters noted, it would be 

difficult for these stakeholders to 

identify how a creditor took into 

account the required factors if the 

creditor does not have written policies 

and procedures for how it takes them 

into account. Further, given the 

flexibility that this final rule provides to 

creditors by removing the DTI limit, the 

Bureau concludes that it is important for 

creditors to adopt and memorialize their 

institutional policies and procedures 

(including underwriting standards) for 

considering the consumer’s income or 

assets, debt obligations, alimony, child 

support, and DTI or residual income, to 

help ensure that the consideration is 

sufficiently rigorous. The Bureau also 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86353 

concludes that this clarification will 

assist creditors in ensuring compliance 

with the General QM requirements by 

helping to prevent individual loan 

officers and underwriters from 

attempting to originate General QMs 

without having met the consider 

requirement. The Bureau additionally 

concludes that this clarification will 

impose a limited burden given that 

standard market practice is to maintain 

underwriting standards and policies and 

procedures. 

Comment 43(e)(2)(v)(A)–1 also 

explains that to comply with 

§ 1026.43(e)(2)(v)(A)—and thereby to 

qualify for General QM status—a 

creditor must retain documentation 

showing how it took into account the 

required factors in its ability-to-repay 

determination, including how it applied 

its policies and procedures. This reflects 

a modification from the proposal, which 

would have cross-referenced the 

creditor’s obligation under § 1026.25(a) 

to retain documentation. The 

requirement continues to defer to 

creditors on how to consider the 

required factors, allowing creditors the 

flexibility to use their own underwriting 

standards as long as the loan file 

documents how the required factors 

were taken into account in the creditor’s 

ability-to-repay determination. 

The General QM loan definition 

currently contains a 43 percent DTI 

limit, so any third party can compare 

the consumer’s DTI (as reflected in the 

loan file) to the limit to confirm that the 

requirement to consider income or 

assets and debts was met. In contrast, 

under this final rule, the General QM 

consider requirement allows the 

creditor to determine how debt, 

alimony, child support, income or 

assets, and DTI or residual income 

should be taken into account in its 

ability-to-repay determination. 

Although there is a general record 

retention requirement in the ATR/QM 

Rule, the Bureau agrees with the 

commenter that this revised consider 

requirement should include a 

documentation component because, 

absent a documentation requirement, 

only the creditor would know how and 

whether it took into account the 

required factors in its ability-to-repay 

determination. Documentation of how 

the creditor considered the required 

factors is necessary for any third party, 

such as consumers, investors, and 

regulators, to confirm that the creditor 

did, in fact, consider the required 

factors. 

Given statements from commenters 

about the interaction between the 

documentation requirement and QM 

status, the Bureau concludes that adding 

clarifying language to this 

documentation retention requirement is 

necessary. The final rule’s commentary 

explains that in order to meet the 

consider requirement and thereby meet 

the requirements for a QM under 

§ 1026.43(e)(2)—whether the loan is a 

safe harbor QM under § 1026.43(e)(1)(i) 

or a rebuttable presumption QM under 

§ 1026.43(e)(1)(ii)—a creditor must 

retain documentation showing how it 

took into account these factors in its 

ability-to-repay determination, 

including how it applied its policies 

and procedures. To clarify that a lack of 

documentation showing how the 

creditor took into account the required 

factors would result in loss of QM 

status, rather than constituting a mere 

violation of the record retention 

requirement in § 1026.25(a), the Bureau 

is removing the proposed crossreference to the record retention 

requirement in § 1026.25(a). The Bureau 

is adopting the documentation examples 

in the last sentence, with new language 

to clarify that a creditor can also comply 

by relying on any applicable exceptions 

in the creditor’s policies and procedures 

(in combination with the example 

underwriting documents) to show how 

the creditor took into account the 

required factors. As examples of the 

type of documents that a creditor might 

use to show that income or assets, debt 

obligations, alimony, child support, and 

DTI or residual income were taken into 

account, the comment cites an 

underwriter worksheet or a final 

automated underwriting system 

certification, in combination with the 

creditor’s applicable underwriting 

standards and any applicable exceptions 

described in its policies and procedures, 

that shows how these required factors 

were taken into account in the creditor’s 

ability-to-repay determination. 

In summary, comment 43(e)(2)(v)(A)– 

1 explains that the § 1026.43(e)(2)(v)(A) 

consider requirement means to take into 

account income or assets, debt 

obligations, alimony, child support, and 

monthly debt-to-income ratio or 

residual income in the consumer’s 

ability-to-repay determination, 

including maintaining written policies 

and procedures to take into account and 

retaining documentation of how the 

creditor took into account. As detailed 

in comments 43(e)(2)(v)(A)–2 and 

43(e)(2)(v)(A)–3, a creditor has 

flexibility in how it considers income or 

assets, debt obligations, alimony, child 

support, and monthly debt-to-income 

ratio or residual income, as long as the 

creditor documents how it took into 

account these required factors in its 

ability-to-repay determination. For 

example, a creditor might originate a 

loan with a DTI that deviates from the 

standard DTI threshold in its 

underwriting guidelines because the 

consumer’s significant savings meets an 

exception in those guidelines. Under 

this example, the internal thresholds 

and exceptions qualify as procedures for 

taking into account, and documentation 

of how the creditor applied this 

exception to the loan file shows how the 

required factors were taken into account 

under § 1026.43(e)(2)(v)(A). 

The creditor’s maintenance of written 

policies and procedures facilitates 

review of the loan file to confirm that 

the creditor did, in fact, document how 

it took into account income or assets, 

debt, alimony, child support, and DTI 

ratio or residual income. The 

documentation provision requires a 

creditor to retain documentation to 

show how it applied its written policies 

and procedures, and, to the extent it 

deviated from them, to further retain 

documentation of how the creditor 

nonetheless took into account the 

required factors. The documentation 

examples listed in the comment (an 

underwriter worksheet or a final 

automated underwriting system 

certification, in combination with the 

creditor’s applicable underwriting 

standards and any applicable exceptions 

described in its policies and procedures, 

that show how these required factors 

were taken into account in the creditor’s 

ability-to-repay determination) can be 

sufficient to show how the creditor 

applied its written policies and 

procedures. For example, a typical loan 

application may fall within the 

creditor’s underwriting standards, so an 

underwriter worksheet could contain 

enough information to show how the 

creditor took into account the required 

factors under the creditor’s 

underwriting standards. Another 

example is a loan application that 

triggers exceptions, where the 

underwriter worksheet might state that 

certain exceptions were applied, and 

referring to the creditor’s policies and 

procedures would clarify how those 

exceptions took into account the 

required factors. In contrast to the 

discussion in the previous paragraph, a 

creditor would not meet the 

§ 1026.43(e)(2)(v)(A) consider 

requirement if the creditor deviated 

from its policies and procedures and its 

documentation failed to show how the 

required factors were taken into 

account. For example, a creditor would 

not meet the § 1026.43(e)(2)(v)(A) 

consider requirement if the consumer 

did not meet its own underwriting 

standards and the creditor merely made 


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86354 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

274 78 FR 6408, 6561 (Jan. 30, 2013) (‘‘In some 

cases, lenders and borrowers entered into loan 

contracts on the misplaced belief that the home’s 

value would provide sufficient protection. These 

cases included subprime borrowers who were 

offered loans because the lender believed that the 

house value either at the time of origination or in 

the near future could cover any default. Some of 

these borrowers were also counting on increased 

housing values and a future opportunity to 

refinance; others likely understood less about the 

transaction and were at an informational 

disadvantage relative to the lender.’’); id. at 6564 

(‘‘During those periods there were likely some 

lenders, as evidenced by the existence of noincome, no-asset (NINA) loans, that used 

underwriting systems that did not look at or verify 

income, debts, or assets, but rather relied primarily 

on credit score and LTV.’’); id. at 6559 (‘‘If the 

lender is assured (or believes he is assured) of 

recovering the value of the loan by gaining 

possession of the asset, the lender may not pay 

sufficient attention to the ability of the borrower to 

repay the loan or to the impact of default on third 

parties. For very low LTV mortgages, i.e., those 

where the value of the property more than covers 

the value of the loan, the lender may not care at 

all if the borrower can afford the payments. Even 

for higher LTV mortgages, if prices are rising 

sharply, borrowers with even limited equity in the 

home may be able to gain financing since lenders 

can expect a profitable sale or refinancing of the 

property as long as prices continue to rise . . . . In 

all these cases, the common problem is the failure 

of the originator or creditor to internalize particular 

costs, often magnified by information failures and 

systematic biases that lead to underestimation of 

the risks involved. The first such costs are simply 

the pecuniary costs from a defaulted loan—if the 

loan originator or the creditor does not bear the 

ultimate credit risk, he or she will not invest 

sufficiently in verifying the consumer’s ability to 

repay.’’). 

a note that the loan was approved by 

management. 

As the Bureau explained in the 

General QM Proposal, the 

§ 1026.43(e)(2)(v)(A) consider 

requirement means that if a creditor 

ignores the required factors of income or 

assets, debt obligations, alimony, child 

support, and DTI or residual income— 

or otherwise did not take them into 

account as part of its ability-to-repay 

determination—the loan would not be 

eligible for QM status. Consumer 

advocate commenters asked the Bureau 

to add examples of non-compliance, 

such as loans with 100 percent DTI or 

zero residual income, and LTV-based 

loans, arguing that these examples 

would help prevent loans from 

receiving QM status when debts and 

income did not demonstrate a 

consumer’s ability to repay. 

The Bureau declines to codify 

extreme examples of non-compliance in 

the final rule. Although the Bureau 

concludes that loans for which a 

consumer has 100 percent DTI or zero 

or negative residual income—and no 

significant assets unrelated to the value 

of the dwelling that could support the 

mortgage loan payments—would not 

meet the General QM consider standard 

because the only reasonable conclusion 

would be that the creditor did not 

consider DTI or residual income, 

putting such extreme examples in the 

rule could be incorrectly interpreted to 

permit any less extreme practices. For 

example, a creditor might originate a 

loan to consumer in a family of four 

with $200 in monthly residual income 

and no significant assets unrelated to 

the value of the dwelling. Although the 

only reasonable conclusion is that the 

creditor ignored the consumer’s residual 

income and did not meet the General 

QM consider requirement, creditors 

might perceive the extreme noncompliance example to mean that only 

zero or negative residual income loans 

could violate the rule. 

The Bureau concludes that adding an 

LTV ratio or other home equity 

discussion to the General QM consider 

requirement would introduce too much 

confusion, thereby undermining the 

need for clarity of QM status, and 

declines to adopt this recommendation. 

For example, some creditors may 

determine that consumers with a higher 

DTI have an ability to repay according 

to their underwriting policy, but due to 

market risk tolerance will only originate 

that higher DTI loan if the consumer has 

a relatively low LTV ratio. Although 

that loan may meet the consider 

requirement because the creditor 

applied its underwriting guidelines and 

showed how that DTI met its 

established DTI underwriting 

thresholds, adding a discussion about 

LTV ratio to the General QM consider 

requirement could be misconstrued to 

undermine the loan’s General QM 

status. In contrast, commenters raised 

concerns about industry practices when 

a creditor ignores consumer debt, 

income, and DTI or residual income and 

instead relies on LTV ratio, such as with 

loan flipping. As discussed in the 

General QM Proposal and the January 

2013 Final Rule, the Bureau is aware of 

concerns about creditors relying on 

factors related to the value of the 

dwelling, like LTV ratio, and how such 

reliance may have contributed to the 

mortgage crisis.274 The Bureau agrees 

that reliance on LTV ratio or another 

measure of current or future home 

equity, in conjunction with a 100 

percent DTI or no residual income and 

no other significant assets unrelated to 

the value of the dwelling, support a 

conclusion that a creditor did not meet 

the § 1026.43(e)(2)(v)(A) requirement to 

consider the consumer’s current or 

reasonably expected income or assets 

other than the value of the dwelling 

securing the mortgage, debt obligations, 

alimony, child support, and monthly 

DTI ratio or residual income. 

The Bureau declines to change the 

General QM consider requirement from 

a standard to show how the creditor 

took into account to a standard to show 

that the creditor took into account. The 

suggested language change would 

remove the requirement for creditors to 

connect their consideration of the 

required factors to the ability-to-repay 

determination, making the consider 

requirement a check-the-box exercise 

under which a file could merely state 

that the factors were considered even if 

the creditor ignored debts and income. 

Instead, the Bureau concludes that 

creditors must show how it took into 

account the required factors, including, 

for example, showing how it applied its 

underwriting procedures to the 

consumer’s loan application. 

Comment 43(e)(2)(v)(A)–2. The 

Bureau is finalizing comment 

43(e)(2)(v)(A)–2 as proposed. To 

reinforce that the General QM loan 

definition no longer includes a specific 

DTI limit, comment 43(e)(2)(v)(A)–2 

highlights that creditors have flexibility 

in how they consider these factors. 

Comment 43(e)(2)(v)(A)–2 clarifies that 

§ 1026.43(e)(2)(v)(A) does not prescribe 

specifically how a creditor must 

consider monthly debt-to-income ratio 

or residual income and also does not 

prescribe a particular monthly debt-toincome ratio or residual income 

threshold with which a creditor must 

comply. To assist creditors in 

understanding their compliance 

obligations, the Bureau is finalizing two 

examples of how to comply with the 

requirement to consider DTI or residual 

income. Comment 43(e)(2)(v)(A)–2 

provides an example in which a creditor 

considers monthly DTI or residual 

income by establishing monthly DTI or 

residual income thresholds for its own 

underwriting standards and 

documenting how those thresholds were 

applied to determine the consumer’s 

ability to repay. Given that some 

creditors use several thresholds that 

depend on any relevant compensating 

factors, the Bureau is finalizing a second 

example. The second example provides 

that a creditor may also consider DTI or 

residual income by establishing 

monthly DTI or residual income 

thresholds and exceptions to those 

thresholds based on other compensating 

factors, and documenting application of 

the thresholds along with any 

applicable exceptions. The Bureau 

concludes that both examples are 

consistent with current market practices 

and therefore providing these examples 

would clarify a loan’s QM status 

without imposing a significant burden 

on the market. 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86355 

Comment 43(e)(2)(v)(A)–3. The 

Bureau is finalizing comment 

43(e)(2)(v)(A)–3 as proposed. The 

Bureau is aware that some creditors look 

to factors in addition to income or 

assets, debt obligations, alimony, child 

support, and DTI or residual income in 

determining a consumer’s ability to 

repay. For example, the Bureau is aware 

that some creditors may look to net cash 

flow into a consumer’s deposit account 

as a method of residual income analysis. 

A net cash flow calculation typically 

consists of residual income, further 

reduced by consumer expenditures 

other than those already subtracted as 

part of the residual income calculation. 

Accordingly, the result of a net cash 

flow calculation may be useful in 

assessing the adequacy of a particular 

consumer’s residual income. Comment 

43(e)(2)(v)(A)–3 clarifies that the 

requirement in § 1026.43(e)(2)(v)(A) to 

consider income or assets, debt 

obligations, alimony, child support, and 

monthly DTI or residual income does 

not preclude the creditor from taking 

into account additional factors that are 

relevant in making its ability-to-repay 

determination. 

The comment further provides that 

creditors may look to existing comment 

43(c)(7)–3 for guidance on considering 

additional factors in determining the 

consumer’s ability to repay. Comment 

43(c)(7)–3 explains that creditors may 

consider additional factors when 

determining a consumer’s ability to 

repay and provides an example of 

looking to consumer assets other than 

the value of the dwelling, such as a 

savings account. 

Legal Authority 

The Bureau is finalizing the 

requirement 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, debt obligations, 

alimony, and child support under 

§ 1026.43(e)(2)(A) pursuant to its 

adjustment and exception authority 

under TILA section 129C(b)(3)(B)(i). The 

Bureau finds that this addition to the 

General QM criteria is necessary and 

proper to ensure that responsible, 

affordable mortgage credit remains 

available to consumers in a manner that 

is consistent with the purposes of TILA 

section 129C and necessary and 

appropriate to effectuate the purposes of 

TILA section 129C, which includes 

assuring that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loan. The Bureau also 

incorporates this requirement pursuant 

to its authority under TILA section 

105(a) to issue regulations that, among 

other things, contain such additional 

requirements or other provisions, or that 

provide for such adjustments for all or 

any class of transactions, that in the 

Bureau’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, which include the above purpose 

of section 129C. The Bureau finds that 

including consideration of DTI or 

residual income in the General QM loan 

criteria is necessary and proper to fulfill 

the purpose of assuring that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

The Bureau also finds that 

§ 1026.43(e)(2)(A) 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 DTI ratios or 

alternative measures of ability to pay 

regular expenses after payment of total 

monthly debt. 

43(e)(2)(v)(B) 

The Bureau’s Proposal 

The Bureau proposed to revise 

§ 1026.43(e)(2)(v)(B) to provide that a 

General QM would be a covered 

transaction for which the creditor, at or 

before consummation, verifies 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 using third-party 

records that provide reasonably reliable 

evidence of the consumer’s income or 

assets, in accordance with 

§ 1026.43(c)(4) and verifies the 

consumer’s current debt obligations, 

alimony, and child support using 

reasonably reliable third-party records 

in accordance with § 1026.43(c)(3). The 

proposal would have removed 

requirements that creditors verify this 

information in accordance with 

appendix Q and would have removed 

appendix Q from Regulation Z entirely. 

To clarify the verification requirement 

in § 1026.43(e)(2)(v)(B), the Bureau 

proposed to add comments 

43(e)(2)(v)(B)–1 through –3. Proposed 

comment 43(e)(2)(v)(B)–1 stated that 

§ 1026.43(e)(2)(v)(B) does not prescribe 

specific methods of underwriting that 

creditors must use. This proposed 

comment further provided that, as long 

as a creditor complies with the 

provisions of § 1026.43(c)(3) with 

respect to verification of debt 

obligations, alimony, and child support 

and § 1026.43(c)(4) with respect to 

verification of income and assets, 

creditors would be permitted to use any 

reasonable verification methods and 

criteria. 

The Bureau proposed comment 

43(e)(2)(v)(B)–2 to clarify that ‘‘current 

and reasonably expected income or 

assets other than the value of the 

dwelling (including any real property 

attached to the dwelling) that secures 

the loan’’ is determined in accordance 

with § 1026.43(c)(2)(i) and its 

commentary and that ‘‘current debt 

obligations, alimony, and child 

support’’ has the same meaning as 

under § 1026.43(c)(2)(vi) and its 

commentary. The proposed comment 

further stated that § 1026.43(c)(2)(i) and 

(vi) and the associated commentary 

apply to a creditor’s determination with 

respect to what inflows and property it 

may classify and count as income or 

assets and what obligations it must 

classify and count as debt obligations, 

alimony, and child support, pursuant to 

its compliance with 

§ 1026.43(e)(2)(v)(B). 

Proposed comment 43(e)(2)(v)(B)–3.i 

provided that a creditor also complies 

with § 1026.43(e)(2)(v)(B) if the creditor 

satisfies specified verification standards 

(verification safe harbor). In the sectionby-section analysis of proposed 

§ 1026.43(e)(2)(v)(B), the Bureau stated 

that these verification standards may 

include relevant provisions in specified 

versions of the Fannie Mae Single 

Family Selling Guide, the Freddie Mac 

Single-Family Seller/Servicer Guide, the 

FHA’s Single Family Housing Policy 

Handbook, the VA’s Lenders Handbook, 

and the USDA’s Field Office Handbook 

for the Direct Single Family Housing 

Program and the Handbook for the 

Single Family Guaranteed Loan Program 

(‘‘manuals’’), as of the date of the 

proposal’s public release. The Bureau 

sought comment on whether these or 

other verification standards should be 

incorporated into proposed comment 

43(e)(2)(v)(B)–3.i. In the section-bysection analysis of proposed 

§ 1026.43(e)(2)(v)(B), the Bureau also 

encouraged stakeholders to develop 

additional verification standards and 

stated that it would review any such 

standards for potential inclusion in the 

safe harbor. 

Proposed comment 43(e)(2)(v)(B)–3.ii 

provided that a creditor complies with 

§ 1026.43(e)(2)(v)(B) if it complies with 

requirements in the verification 

standards listed in comment 

43(e)(2)(v)(B)–3 for creditors to verify 

income or assets, debt obligations, 

alimony and child support using 

specified documents or to include or 

exclude particular inflows, property, 

and obligations as income, assets, debt 

obligations, alimony, and child support. 


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86356 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

275The Bureau addresses comments on the 

Bureau’s proposal regarding appendix Q in the 

section-by-section analysis for appendix Q, below. 

Proposed comment 43(e)(2)(v)(B)–3.iii 

stated that, for purposes of compliance 

with § 1026.43(e)(2)(v)(B), a creditor 

need not comply with requirements in 

the verification standards listed in 

comment 43(e)(2)(v)(B)–3.i other than 

those that require creditors to verify 

income, assets, debt obligations, 

alimony, and child support using 

specified documents or to classify and 

count particular inflows, property, and 

obligations as income, assets, debt 

obligations, alimony, and child support. 

Proposed comment 43(e)(2)(v)(B)–3.iv 

stated that a creditor also complies with 

§ 1026.43(e)(2)(v)(B) where it complies 

with revised versions of verification 

standards listed in comment 

43(e)(2)(v)(B)–3.i, provided that the two 

versions are substantially similar. 

Finally, proposed comment 

43(e)(2)(v)(B)–3.v provided that a 

creditor complies with 

§ 1026.43(e)(2)(v)(B) if it complies with 

the verification requirements in one or 

more of the verification standards 

specified in comment 43(e)(2)(v)(B)–3.i. 

The proposed comment stated that, 

accordingly, a creditor may, but need 

not, comply with § 1026.43(e)(2)(v)(B) 

by complying with the verification 

standards from more than one manual 

(in other words, by ‘‘mixing and 

matching’’ verification requirements). 

For the reasons described below, the 

Bureau adopts § 1026.43(e)(2)(v)(B) and 

comments 43(e)(2)(v)(B)–1 through –3 as 

proposed, except that, in this final rule, 

§ 1026.43(e)(2)(v)(B) lists the applicable 

verification standards for the 

verification safe harbor in comment 

43(e)(2)(v)(B)–3.i and includes minor 

edits to provide clarity. The verification 

standards listed in comment 

43(e)(2)(v)(B)–3.i are the same 

verification standards that the Bureau 

listed in the proposal and stated that it 

may include in the verification safe 

harbor. 

Comments Received 

Commenters generally supported the 

Bureau’s overall approach of replacing 

appendix Q with a requirement to use 

third-party records that provide 

reasonably reliable evidence of the 

consumer’s income, assets, debt 

obligations, alimony, and child support. 

Several commenters recommended 

modifications to the proposal, as 

described and organized below based on 

the topic of concern.275

Verification safe harbor. Commenters 

generally supported including, in the 

list of specified external verification 

standards, the portions of the GSE, FHA, 

VA, and USDA manuals that the Bureau 

listed in the proposal. Both GSEs 

supported the safe harbor for the 

verification standards in their manuals 

resulting from proposed comment 

43(e)(2)(v)(B)–3. Both GSEs stated that 

the commentary should reference not 

only the verification standards in their 

manuals but should also reference 

amendments, letters, and other creditorspecific waivers of provisions that are 

not included in their manuals. One GSE 

stated that the Bureau should require 

creditors to comply with its entire 

manual—not just with its verification 

standards—to receive the verification 

safe harbor. An industry commenter 

stated that automatic loan origination 

system reports, specifically Fannie 

Mae’s Desktop Underwriter and Freddie 

Mac’s Loan Prospector, should be 

conclusive proof of compliance with the 

verification requirements of 

§ 1026.43(e)(2)(v)(B) and its related 

commentary. A research center 

commenter stated that, for rebuttable 

presumption General QM loans, income 

and debt verification is effectively the 

only issue a consumer might challenge, 

and therefore the verification safe 

harbor would result in creditors facing 

about the same legal exposure on a 

rebuttable presumption QM as on a safe 

harbor QM. The commenter asserted 

that this would provide less protection 

to consumers and more leverage for 

increased home prices. 

The Bureau declines to extend the 

verification safe harbor for materials 

outside of the scope of the verification 

standards in the specified manuals. The 

Bureau is concerned that the automatic 

inclusion of any amendments or 

modifications to manuals could cause 

significant changes in the creditor 

obligations and consumer protections 

without review by the Bureau. The 

Bureau will monitor changes to the 

manuals and incorporate updated 

versions if necessary. The Bureau is also 

concerned about incorporating 

standards that are not publicly 

available. The Bureau also declines to 

extend the safe harbor for matters 

beyond the verification standards 

within the specified GSE manuals. The 

Bureau is not aware of a reason why a 

creditor’s compliance with standards 

unrelated to verification should be 

required for the creditor to obtain the 

benefit of the safe harbor for compliance 

with the Bureau’s verification 

requirement. In addition, referencing 

the rest of the GSE manuals could lead 

to confusion among creditors or 

secondary market participants, because 

those manuals also contain 

requirements not related to verification 

standards—for example, housing 

expense ratios, DTI limits, or LTV limits 

that may be inconsistent with the 

provisions on related issues in the 

General QM loan definition. The Bureau 

also declines to extend a verification 

safe harbor merely for the inclusion of 

an approval acknowledgment generated 

by an automated underwriting system 

maintained by the GSEs or other 

institution, because modifications to the 

automated underwriting system 

approval process may deviate from the 

specified manuals and the Bureau 

would not be able to evaluate the nature 

and extent of such deviations without 

prior review. 

The Bureau additionally disagrees 

with the research center commenter’s 

assertion that the verification safe 

harbor would result in creditors facing 

about the same legal exposure on a 

rebuttable presumption QM as on a safe 

harbor QM. The Bureau notes that the 

verification safe harbor provides 

creditors with a safe harbor only for 

compliance with the verification 

requirement in § 1026.43(e)(2)(v)(B). 

The verification safe harbor does not 

preclude consumers from asserting that 

the creditor did not comply with 

§ 1026.43(e)(2)(v)(A), for example, by 

failing to take into account the 

consumer’s DTI ratio or residual income 

in the creditor’s ability-to-repay 

determination. Moreover, consumers 

could still rebut the presumption by 

demonstrating that they had insufficient 

residual income to cover their living 

expenses as explained in comment 

43(e)(1)(ii)–1. 

Use of revised manuals that are 

substantially similar. The Bureau 

requested comment on whether 

creditors that comply with verification 

standards in revised versions of the 

listed manuals that are substantially 

similar to the listed versions should also 

receive a verification safe harbor, as the 

Bureau proposed. The Bureau also 

requested comment on whether the Rule 

should include illustrations of revisions 

to the manuals that might qualify as 

substantially similar, and if so, what 

types of illustrations would provide 

helpful clarification to creditors and 

other stakeholders. 

Commenters generally supported the 

inclusion of a verification safe harbor 

for verification standards in the listed 

manuals that have been revised but are 

substantially similar, but some 

commenters suggested alternative 

approaches. A GSE supported the 

substantially similar standard but 

requested that the Bureau clarify the 

meaning of substantially similar. In 

contrast, some industry commenters 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86357 

276TILA section 129C(b)(3)(ii); 15 U.S.C. 

1639c(b)(3)(ii). 

stated that creditors should receive a 

safe harbor for compliance with the 

revised version of the manuals whether 

or not they are substantially similar. 

Some industry commenters stated that 

the Bureau should adjust the 

commentary to presume the revised 

versions of manuals are valid unless 

they materially deviate from the prior 

version. Some industry commenters 

stated that the Bureau should adopt a 

mechanism by which the Bureau could 

review and determine if revised 

manuals are substantially similar to the 

versions referenced in comment 

43(e)(2)(v)(B)–3.i. Some industry 

commenters stated that the Bureau 

should include a statement that affirms 

that verification standards adopted by a 

creditor that are materially similar to 

those in the manuals referenced in 

comment 43(e)(2)(v)(B)–3.i should also 

receive a verification safe harbor. 

The Bureau is adopting comment 

43(e)(2)(v)(B)–3.i as proposed. The 

Bureau determines that commenters’ 

suggested clarifications of the 

substantially similar standard in fact 

would not provide greater clarity. For 

example, the Bureau determines that a 

standard providing that the revised 

manual receives a verification safe 

harbor provided that it does not 

‘‘materially deviate’’ or is ‘‘materially 

similar’’ would not be appreciably 

clearer than a standard that the revised 

manual be ‘‘substantially similar.’’ 

The Bureau additionally notes that, in 

proposing to extend the verification safe 

harbor to substantially similar versions 

of the verification standards in the 

manuals, the Bureau did not intend for 

creditors to always be responsible for 

determining on their own whether a 

revised version of a listed manual is 

substantially similar to a version 

adopted in this final rule. Rather, the 

Bureau intends to provide further clarity 

to creditors by releasing guidance, as 

appropriate, regarding whether future 

revisions of manuals qualify as 

‘‘substantially similar’’ for purposes of 

the verification safe harbor. The 

following three illustrations show how 

the Bureau may evaluate future changes 

to the manuals. The Bureau believes 

these illustrations may help creditors 

anticipate if and when the Bureau may 

address whether future revisions of 

manuals are eligible for a safe harbor. 

First, revisions only to provisions 

within the manuals that are not 

referenced in comment 43(e)(2)(v)(B)–3.i 

would result in a revised version that is 

substantially similar. For example, a 

revised version of the FHA’s Single 

Family Housing Policy Handbook that 

makes changes only to Section III, 

Servicing and Loss Mitigation, would be 

substantially similar for purposes of 

comment 43(e)(2)(v)(B)–3.i because 

there are no changes to the verification 

standards contained in Sections II.A.1 

and II.A.4–5 of that Handbook. 

Second, the portions of the manuals 

referenced in comment 43(e)(2)(v)(B)–3.i 

contain not only verification standards, 

but also additional provisions related to 

the underwriting of the mortgage. 

Consistent with comment 43(e)(2)(v)(B)– 

3.iii, revisions only to these unrelated 

underwriting provisions would produce 

a revised version that would be 

substantially similar. As an illustration, 

the Freddie Mac Single-Family Seller/ 

Servicer Guide chapter 5401.1 requires 

a review of the consumer’s monthly 

housing expense-to-income ratio. 

Chapter 5401.1 is contained within the 

portions of the Freddie Mac SingleFamily Seller/Servicer Guide listed in 

comment 43(e)(2)(v)(B)–3.i. However, 

revised versions of Chapter 5401.1 

concerning a consumer’s monthly 

housing expense-to-income ratio would 

be substantially similar to the manual in 

comment 43(e)(2)(v)(B)–3.i, since these 

provisions of chapter 5401.1 do not 

relate to the verification of income, 

assets, debt obligations, alimony, or 

child support by use of reasonably 

reliable third-party records. 

Third, revisions to the manuals 

concerning verification standards may 

or may not be substantially similar. The 

Bureau may evaluate such revisions to 

determine if the revised manual is 

substantially similar to the version 

referenced in comment 43(e)(2)(v)(B)– 

3.i. As an illustration, Fannie Mae 

Selling Guide chapter B–3–3.2–01 

generally requires two years of 

individual and business tax returns to 

verify a consumer’s income. Business 

tax returns, however, are not required if 

the consumer is using personal funds to 

pay for down payment, closing, and 

escrow account amounts; the consumer 

has been in same business for five years; 

and the consumer’s individual tax 

returns show an increase in selfemployment income. A revised version 

of the Fannie Mae Selling Guide that 

amends chapter B–3–3.2–01 to change 

any of these requirements for verifying 

self-employed income may or may not 

make the revised Selling Guide 

substantially similar to the Fannie Mae 

Selling Guide issued on June 3, 2020. 

The Bureau may consider providing 

additional guidance to address any such 

revisions. 

‘‘Mixing and matching’’ of verification 

standards. The Bureau also sought 

comment on its proposal to allow 

creditors to ‘‘mix and match’’ 

verification standards from different 

manuals, including whether examples 

of such mixing and matching would be 

helpful and whether the Bureau should 

instead limit or prohibit such mixing 

and matching, and why. Some industry 

commenters supported the ability of 

creditors to mix and match the 

verification standards from the manuals 

because it would provide flexibility and 

would not restrict creditors from 

adopting wholesale verification 

standards from a single external party. 

Some consumer advocate commenters 

opposed permitting creditors to mix and 

match verification standards from the 

manuals because allowing mixing and 

matching would introduce unnecessary 

subjectivity into the rule, although the 

commenters did not explain how. These 

consumer advocate commenters also 

stated that allowing mixing and 

matching could enable creditors to 

exploit differences in approaches 

between manuals. These commenters 

did not explain or provide examples of 

how creditors might do so or of what 

harm could result. 

The Bureau concludes 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. The 

GSEs and Federal agencies that 

maintain the manuals have had 

considerable historical experience in 

determining which records and 

supplemental records are reasonably 

reliable third-party records for purposes 

of verifying income, assets, debt 

obligations, alimony, and child support, 

as well as determining the need for 

updated information over applicable 

timeframes. Each of the manuals has 

also been historically relied upon for 

those purposes by Congress, the Bureau, 

secondary market participants, and 

creditors. Congress included separate 

QM definitions for loans insured or 

guaranteed by FHA, VA, and USDA 

without establishing separate thirdparty verification standards other than 

those established by their respective 

agencies.276 The third-party verification 

standards of the GSEs also served as a 

basis for verification under the 

Temporary GSE QM loan definition 

under § 1026.43(e)(4), and the Bureau is 

not aware of resulting instances of harm 

caused by inadequately verified income 

or assets, debt obligations, alimony and 

child support. 

The Bureau has analyzed the relevant 

provisions of the manuals and has not 

identified ways that creditors may 

exploit differences between them or 


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86358 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

277See, e.g., OMB Circular A–119: Federal 

Participation in the Development and Use of 

Voluntary Consensus Standards and in Conformity 

Assessment Activities (Jan. 27, 2016), https://

www.whitehouse.gov/wp-content/uploads/2020/07/ 

revised_circular_a-119_as_of_1_22.pdf. 

278See, e.g., 18 U.S.C. 1001, 1010, 1014, 1028, 

1341 through 1344. 

279The Bureau has also made some nonsubstantive changes to terminology in final 

comments 43(e)(2)(v)(B)–1 through –3 to ensure 

consistent usage of terms throughout the 

commentary. 

280The referenced versions of the guides, or 

relevant sections thereof, are publicly available on 

the internet. The Fannie Mae Single Family Selling 

Guide, published June 3, 2020 can be found at 

http://www.allregs.com/tpl/public/fnma_

freesiteconv_tll.aspx. The Freddie Mac SingleFamily Seller/Servicer Guide, published June 10, 

2020 can be found at https://www.allregs.com/tpl/ 

public/fhlmc_freesite_tll.aspx. The FHA’s Single 

Family Housing Policy Handbook, issued October 

24, 2019 can be found at https://

www.regulations.gov/document?D=CFPB-2020- 

how mixing and matching would add 

subjectivity to the ATR/QM Rule’s 

verification requirements. As noted, 

commenters did not cite examples of 

how this might occur. Permitting 

creditors to mix and match verification 

standards may allow creditors to use 

different manuals, but the Bureau has 

not identified evidence that 

combinations of historically accepted 

third-party record verification standards 

will, by virtue of their combination, 

result in insufficient verification of 

income, assets, debt obligations, 

alimony, or child support because the 

creditor uses different manuals for the 

verification of the information provided. 

The Bureau also determines, based on 

its analysis of the relevant provisions of 

the manuals, that permitting creditors to 

‘‘mix and match’’ would not add 

subjectivity to the Rule’s verification 

requirements. 

Adding standards created by a selfregulatory organization (SRO). In the 

General QM Proposal, the Bureau 

encouraged stakeholders to develop 

additional verification standards that 

the Bureau could incorporate into the 

verification safe harbor and stated that 

it would review any such standards for 

potential inclusion in the safe harbor. 

Commenters did not provide any 

stakeholder-developed verification 

standards for review. However, several 

industry commenters stated that the 

Bureau should use verification 

standards adopted by a self-regulatory 

organization (SRO), in addition to or as 

a replacement for the standards listed in 

the proposal. Commenters that 

suggested this approach generally 

discussed such adoption as a future 

objective, as such standards, or even 

such an SRO, do not appear to exist at 

this time. One of these commenters 

recommended that the Bureau include 

in the safe harbor the GSE and Federal 

agency manuals listed in the proposal 

only until an industry-developed 

standard is established and approved by 

the Bureau. 

The Bureau notes that there is no 

evidence in the record that such an 

SRO, much less verification standards 

created by such an entity or other 

consortium of industry stakeholders, 

exists. Accordingly, the Bureau 

determines that it would be premature 

to include such standards in the 

verification safe harbor. However, the 

Bureau continues to encourage 

stakeholders, including groups of 

stakeholders, to develop verification 

standards.277 The Bureau is interested 

in reviewing any such standards that 

stakeholders develop for potential 

inclusion in the verification safe harbor. 

Stakeholder standards could 

incorporate, in whole or in part, any 

standards that the Bureau specifies as 

providing a verification safe harbor, 

including mixing and matching these 

standards. 

Preventing use of fraudulent 

documentation. The joint consumer 

advocate term sheet requested that the 

Bureau affirm that documentation that 

is falsified or the subject of fraud by or 

with the knowledge and consent of the 

lender, broker, or their agents would not 

comply with the verification 

requirement in § 1026.43(e)(2)(v)(B). 

The Bureau agrees that falsified or 

fraudulent documentation is, by 

definition, not a ‘‘reasonably reliable’’ 

third party record. The Bureau further 

notes that creditors have legal 

obligations to protect against such 

instances of mortgage fraud.278 The 

Bureau also notes that the manuals 

listed in the verification safe harbor 

have embedded limitations and 

restrictions on what third-party 

documentation may be used for 

verification that address similar sources 

of law. Accordingly, the Bureau 

determines that the issues presented by 

commenters are already adequately 

addressed by this final rule and by 

existing legal requirements. 

The Final Rule 

The Bureau is adopting 

§ 1026.43(e)(2)(v)(B) and comments 

43(e)(2)(v)(B)–1 through –3 as proposed, 

except that, in this final rule, 

§ 1026.43(e)(2)(v)(B) lists the applicable 

verification standards for the 

verification safe harbor in comment 

43(e)(2)(v)(B)–3.i.279 These verification 

standards are: (1) Chapters B3–3 

through B3–6 of the Fannie Mae Single 

Family Selling Guide, published June 3, 

2020; (2) sections 5102 through 5500 of 

the Freddie Mac Single-Family Seller/ 

Servicer Guide, published June 10, 

2020; (3) sections II.A.1 and II.A.4–5 of 

the FHA’s Single Family Housing Policy 

Handbook, issued October 24, 2019; (4) 

chapter 4 of the VA’s Lenders 

Handbook, revised February 22, 2019; 

(5) chapter 4 of the USDA’s Field Office 

Handbook for the Direct Single Family 

Housing Program, revised March 15, 

2019; and (6) chapters 9 through 11 of 

the USDA’s Handbook for the Single 

Family Guaranteed Loan Program, 

revised March 19, 2020. These 

verification standards are the same 

standards that the Bureau listed in the 

proposal and requested comment on. 

Based on its review of the standards and 

the comments received, Bureau 

concludes that each of the verification 

standards listed in comment 

43(e)(2)(v)(B)–3.i is sufficient to satisfy 

the final rule’s verification requirement. 

The Bureau concludes that these 

amendments to § 1026.43(e)(2)(v)(B) 

will ensure that the ATR/QM Rule’s 

verification requirements are clear and 

detailed enough to provide creditors 

with sufficient certainty about whether 

a loan satisfies the General QM loan 

definition. The Bureau concludes that, 

without such certainty, creditors may be 

less likely to provide General QMs to 

consumers, reducing the availability of 

responsible, affordable mortgage credit. 

The Bureau also finds that these 

verification requirements are flexible 

enough to adapt to emerging issues with 

respect to the treatment of certain types 

of income, assets, debt obligations, 

alimony, and child support, advancing 

the provision of responsible, affordable 

mortgage credit to consumers. The 

Bureau aims to ensure that the 

verification requirement provides 

substantial flexibility for creditors to 

adopt innovative verification methods, 

such as the use of bank account data 

that identifies the source of deposits to 

determine personal income, while also 

specifying examples of compliant 

verification standards to provide greater 

certainty that a loan has QM status. 

As described above, this final rule 

provides that creditors must verify 

income, assets, debt obligations, 

alimony, and child support in 

accordance with the general ATR 

verification provisions in § 1026.43(c)(3) 

and (4). This final rule also provides a 

safe harbor for compliance with 

§ 1026.43(e)(2)(v)(B) if a creditor 

complies with verification standards in 

the manuals listed in comment 

43(e)(2)(v)(B)–3.i. These verification 

standards are available to the public for 

free online.280


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86359 

0020-0002. The chapter 4 of the VA’s Lenders 

Handbook revised February 22, 2019 can be found 

at https://www.regulations.gov/document?D=CFPB2020-0020-0003. The USDA’s Field Office 

Handbook for the Direct Single Family Housing 

Program, revised March 15, 2019 can be found at 

https://www.regulations.gov/document?D=CFPB2020-0020-0005. The USDA’s Handbook for the 

Single Family Guaranteed Loan Program, revised 

March 19, 2020 can be found at https://

www.regulations.gov/document?D=CFPB-2020- 

0020-0004. 

The Bureau determines, based on 

extensive public feedback and its own 

experience and review, that these 

external standards are reasonable and 

would provide creditors with 

substantially greater certainty about 

whether many loans satisfy the General 

QM loan definition—particularly with 

respect to verifying income for selfemployed consumers, consumers with 

part-time employment, and consumers 

with irregular or unusual income 

streams. The Bureau determines that 

these types of income would be 

addressed more fully by these external 

standards than by appendix Q. The 

Bureau determines that, as a result, final 

§ 1026.43(e)(2)(v)(B) would increase 

access to responsible, affordable credit 

for consumers. 

The Bureau emphasizes that a creditor 

would not be required to comply with 

any of the verification standards listed 

in comment 43(e)(2)(v)(B)–3.i in order to 

comply with § 1026.43(e)(2)(v)(B). 

Rather, under this final rule, compliance 

with the listed verification standards 

constitutes compliance with the 

verification requirements of 

§ 1026.43(c)(3) and (4) and their 

commentary, which generally require 

creditors to verify income, assets, debt 

obligations, alimony, and child support 

using reasonably reliable third-party 

records. The Bureau determines that 

this would help address the compliance 

concerns of many creditors and 

commenters associated with appendix 

Q’s lack of clarity. 

The Bureau also determines that this 

final rule would provide creditors with 

the flexibility to develop other methods 

of compliance with the verification 

requirements of § 1026.43(e)(2)(v)(B), 

consistent with § 1026.43(c)(3) and (4) 

and their commentary, an option that 

the Bureau intends to address the 

concerns of creditors and commenters 

that found appendix Q to be too rigid or 

prescriptive. As explained in comment 

43(e)(2)(v)(B)–1, § 1026.43(e)(2)(v)(B) 

does not prescribe specific methods of 

underwriting, and as long as a creditor 

complies with § 1026.43(c)(3) and (4), 

the creditor is permitted to use any 

reasonable verification methods and 

criteria. Furthermore, as comment 

43(e)(2)(v)(B)–3.v clarifies, creditors 

have the flexibility to mix and match 

the verification requirements in the 

standards specified in comment 

43(e)(2)(v)(B)–3.i, and receive a safe 

harbor with respect to verification that 

is made consistent with those standards. 

Comment 43(e)(2)(v)(B)–3.iv explains 

that a creditor complies with 

§ 1026.43(e)(2)(v)(B) if it complies with 

revised versions of the verification 

standards specified in comment 

43(e)(2)(v)(B)–3.i, provided that the two 

versions are substantially similar. The 

GSE and Federal agency standards listed 

in comment 43(e)(2)(V)(B)–3.i are 

regularly updated in response to 

emerging issues with respect to the 

treatment of certain types of debt or 

income. This comment explains that the 

safe harbor described in comment 

43(e)(2)(v)(B)–3.i applies not only to 

verification standards in the specific 

listed versions, but also to revised 

versions of these verification standards, 

as long as the revised version is 

substantially similar. 

As discussed above, the Bureau 

encourages stakeholders, including 

groups of stakeholders, to develop 

verification standards. The Bureau is 

interested in reviewing any such 

standards for potential inclusion in the 

verification safe harbor. Stakeholder 

standards could incorporate, in whole 

or in part, any standards that the Bureau 

specifies as providing a safe harbor, 

including mixing and matching these 

standards. 

Legal Authority 

The Bureau is incorporating the 

requirement that the creditor verify the 

consumer’s current or reasonably 

expected income, assets other than the 

value of the dwelling (including any 

real property attached to the dwelling), 

debt obligations, alimony, and child 

support into the definition of a General 

QM in § 1026.43(e)(2) and revisions to 

its commentary pursuant to its authority 

under TILA section 129C(b)(3)(B)(i). The 

Bureau finds that these provisions are 

necessary and proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner that is consistent with the 

purposes of TILA section 129C and 

necessary and appropriate to effectuate 

the purposes of TILA section 129C, 

which includes assuring that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

The Bureau also adopts these 

provisions pursuant to its authority 

under TILA section 105(a) to issue 

regulations that, among other things, 

contain such additional requirements or 

other provisions, or that provide for 

such adjustments for all or any class of 

transactions, that in the Bureau’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, which 

include the above purpose of section 

129C, among other things. The Bureau 

finds that these provisions are necessary 

and proper to achieve this purpose. In 

particular, the Bureau finds that 

incorporating the requirement that a 

creditor verify a consumer’s current 

debt obligations, alimony, and child 

support into the General QM criteria— 

as well as clarifying that a creditor 

complies with the General QM 

verification requirement where it 

complies with certain verification 

standards issued by third parties that 

the Bureau would specify—ensures that 

creditors verify whether a consumer has 

the ability to repay a General QM. 

Finally, the Bureau concludes that these 

regulatory amendments are authorized 

by TILA section 129C(b)(2)(A)(vi), 

which permits, but does not require, the 

Bureau to adopt guidelines or 

regulations relating to debt-to-income 

ratios or alternative measures of ability 

to pay regular expenses after payment of 

total monthly debt. 

43(e)(2)(vi) 

TILA section 129C(b)(2)(vi) states that 

the term ‘‘qualified mortgage’’ includes 

any mortgage loan that complies with 

any guidelines or regulations 

established by the Bureau relating to 

ratios of total monthly debt to monthly 

income or alternative measure of ability 

to pay regular expenses after payment of 

total monthly debt, taking into account 

the income levels of the consumer and 

such other factors as the Bureau may 

determine relevant and consistent with 

the purposes described in TILA section 

129C(b)(3)(B)(i). TILA section 

129C(b)(3)(B)(i) authorizes the Bureau to 

revise, add to, or subtract from the 

criteria that define a QM upon a finding 

that the changes 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 129C and 

129B, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance with TILA sections 129C 

and 129B. Current § 1026.43(e)(2)(vi) 

implements TILA section 129C(b)(2)(vi), 

consistent with TILA section 

129C(b)(3)(B)(i), and provides that, as a 

condition to be a General QM under 

§ 1026.43(e)(2), the consumer’s total 

monthly DTI ratio may not exceed 43 

percent. Section 1026.43(e)(2)(vi) 

further provides that the consumer’s 

total monthly DTI ratio is generally 


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86360 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

281As explained above in the section-by-section 

discussion of § 1026.43(e)(2)(v)(A), the Bureau 

proposed to move to § 1026.43(e)(2)(v)(A) the 

provisions in existing § 1026.43(e)(2)(vi)(B), which 

specify that the consumer’s monthly DTI ratio is 

determined using the consumer’s monthly payment 

on the covered transaction and any simultaneous 

loan that the creditor knows or has reason to know 

will be made. 282 85 FR 50944, 50948 (Aug. 19, 2020). 

determined in accordance with 

appendix Q. 

For the reasons described in part V 

above, the Bureau proposed to remove 

the 43 percent DTI limit in current 

§ 1026.43(e)(2)(vi) and replace it with a 

price-based approach. The proposal also 

would have required a creditor 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. 

Specifically, the Bureau proposed to 

remove the text of current 

§ 1026.43(e)(2)(vi) and to provide 

instead that, to be a General QM under 

§ 1026.43(e)(2), the APR may not exceed 

APOR for a comparable transaction as of 

the date the interest rate is set by the 

amounts specified in 

§ 1026.43(e)(2)(vi)(A) through (E).281

Proposed § 1026.43(e)(2)(vi)(A) through 

(E) provided specific rate-spread 

thresholds for purposes of 

§ 1026.43(e)(2), including higher 

thresholds for small loan amounts and 

subordinate-lien transactions. Proposed 

§ 1026.43(e)(2)(vi)(A) provided that for a 

first-lien covered transaction with a loan 

amount greater than or equal to 

$109,898 (indexed for inflation), the 

APR may not exceed APOR for a 

comparable transaction as of the date 

the interest rate is set by two or more 

percentage points. Proposed 

§ 1026.43(e)(2)(vi)(B) and (C) provided 

higher thresholds for smaller first-lien 

covered transactions. Proposed 

§ 1026.43(e)(2)(vi)(D) and (E) provided 

higher thresholds for subordinate-lien 

covered transactions. Under the 

proposal, loans priced at or above the 

thresholds in proposed 

§ 1026.43(e)(2)(vi)(A) through (E) would 

not have been eligible for QM status 

under § 1026.43(e)(2). The proposal also 

provided that the loan amounts 

specified in § 1026.43(e)(2)(vi)(A) 

through (E) would be adjusted annually 

for inflation based on changes in the 

Consumer Price Index for All Urban 

Consumers (CPI–U). 

Proposed § 1026.43(e)(2)(vi) also 

provided a special rule for determining 

the APR for purposes of determining a 

loan’s status as a General QM loan 

under § 1026.43(e)(2) for certain ARMs 

and other loans for which the interest 

rate may or will change in the first five 

years of the loan. Specifically, proposed 

§ 1026.43(e)(2)(vi) provided that, for 

purposes of § 1026.43(e)(2)(vi), the 

creditor must determine the APR for a 

loan for which the interest rate may or 

will change within the first five years 

after the date on which the first regular 

periodic payment will be due by 

treating the maximum interest rate that 

may apply during that five-year period 

as the interest rate for the full term of 

the loan. 

The Bureau proposed these revisions 

to § 1026.43(e)(2)(vi) for the reasons set 

forth above in part V.B. As explained 

above, the Bureau proposed to remove 

the 43 percent DTI limit in current 

§ 1026.43(e)(2)(vi) and replace it with a 

price-based approach because the 

Bureau is concerned that 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. The 

Bureau proposed a price-based 

approach to replace the specific DTI 

limit approach because it is concerned 

that imposing a DTI limit as a condition 

for QM status under the General QM 

loan definition may be overly 

burdensome and complex in practice 

and may unduly restrict access to credit 

because it provides an incomplete 

picture of the consumer’s financial 

capacity. In the proposal, the Bureau 

preliminarily concluded that a pricebased General QM loan definition is 

appropriate because a loan’s price, as 

measured by comparing a loan’s APR to 

APOR for a comparable transaction, is a 

strong indicator of a consumer’s ability 

to repay and is a more holistic and 

flexible measure of a consumer’s ability 

to repay than DTI alone. 

The Bureau also proposed to remove 

current comment 43(e)(2)(vi)–1, which 

relates to the calculation of monthly 

payments on a covered transaction and 

for simultaneous loans for purposes of 

calculating the consumer’s DTI ratio 

under current § 1026.43(e)(2)(vi). The 

Bureau did so because, under the 

proposal to move the text of current 

§ 1026.43(e)(2)(vi)(B) and revise it to 

remove the references to appendix Q, 

current comment 43(e)(2)(vi)–1 would 

have been unnecessary. The Bureau 

proposed to replace current comment 

43(e)(2)(vi)–1 with a cross-reference to 

comments 43(b)(4)–1 through –3 for 

guidance on determining APOR for a 

comparable transaction as of the date 

the interest rate is set. The Bureau also 

proposed new comment 43(e)(2)(vi)–2, 

which provided that a creditor must 

determine the applicable rate-spread 

threshold based on the face amount of 

the note, which is the ‘‘loan amount’’ as 

defined in § 1026.43(b)(5), and provided 

an example of a $75,000 loan amount 

that would fall into the proposed tier for 

loans greater than or equal to $65,939 

(indexed for inflation) but less than 

$109,898 (indexed for inflation). In 

addition, the Bureau proposed comment 

43(e)(2)(vi)–3 in which it would have 

published the annually adjusted loan 

amounts to reflect changes in the CPI– 

U. The Bureau also proposed new 

comment 43(e)(2)(vi)–4 to explain the 

proposed special rule that, for purposes 

of § 1026.43(e)(2)(vi), the creditor must 

determine the APR for a loan for which 

the interest rate may or will change 

within the first five years after the date 

on which the first regular periodic 

payment will be due by treating the 

maximum interest rate that may apply 

during that five-year period as the 

interest rate for the full term of the loan. 

The Bureau did not receive comments 

regarding comments 43(e)(2)(vi)–1 

through –3 and is adopting them as 

proposed, except that the $65,939 and 

$109,898 loan amount thresholds in 

comment 43(e)(2)(vi)–2 have been 

revised to $66,156 and $110,260, 

respectively, for consistency with the 

Bureau’s recently-issued final rule that 

adjusted for inflation the related 

thresholds in comment 43(e)(3)(ii)–1.282

The Bureau is also adopting comment 

43(e)(2)(vi)–4 as proposed and that 

comment is discussed further below. 

For the reasons discussed in part V 

and below, the Bureau is adopting a 

price-based approach to defining 

General QMs in § 1026.43(e)(2)(vi) 

pursuant to its authority under TILA 

section 129C(b)(3)(B)(i). The Bureau 

concludes that a price-based approach 

to the General QM loan definition is 

necessary and proper to ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner that is consistent with the 

purposes of TILA section 129C and is 

necessary and appropriate to effectuate 

the purposes of TILA section 129C, 

which includes assuring that consumers 

are offered and receive residential 

mortgage loans on terms that reasonably 

reflect their ability to repay the loan. 

As noted above in part V, the Bureau 

concludes that a price-based General 

QM loan definition best balances 

consumers’ ability to repay with 

ensuring access to responsible, 

affordable mortgage credit. The Bureau 

is amending the General QM loan 

definition because retaining the existing 

43 percent DTI limit would reduce the 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86361 

size of the QM market and likely would 

lead to a significant reduction in access 

to responsible, affordable credit when 

the Temporary GSE QM definition 

expires. The Bureau continues to 

believe that General QM status should 

be determined by a simple, bright-line 

rule to provide certainty of QM status, 

and the Bureau concludes that pricing 

achieves this objective. Furthermore, the 

Bureau concludes that pricing, rather 

than a DTI limit, is a more appropriate 

standard for the General QM loan 

definition. While not a direct measure of 

financial capacity, loan pricing is 

strongly correlated with early 

delinquency rates, which the Bureau 

uses as a proxy for repayment ability. 

The Bureau concludes that conditioning 

QM status on a specific DTI limit would 

likely impair access to credit for some 

consumers for whom it is appropriate to 

presume their ability to repay their 

loans at consummation. Although a 

pricing limit that is set too low could 

also have this effect, compared to DTI, 

loan pricing is a more flexible metric 

because it can incorporate other factors 

that may also be relevant to determining 

ability to repay, including credit scores, 

cash reserves, or residual income. The 

Bureau concludes that a price-based 

General QM loan definition is better 

than the alternatives because a loan’s 

price, as measured by comparing a 

loan’s APR to APOR for a comparable 

transaction, is a strong indicator of a 

consumer’s ability to repay and is a 

more holistic and flexible measure of a 

consumer’s ability to repay than DTI 

alone. 

The Bureau concludes that a pricebased approach to the General QM loan 

definition will both ensure that 

responsible, affordable mortgage credit 

remains available to consumers and 

assure that consumers are offered and 

receive residential mortgage loans on 

terms that reasonably reflect their ability 

to repay the loan. For these same 

reasons, the Bureau is adopting a pricebased requirement in § 1026.43(e)(2)(vi) 

pursuant to its authority under TILA 

section 105(a) to issue regulations that, 

among other things, contain such 

additional requirements or other 

provisions, or that provide for such 

adjustments for all or any class of 

transactions, that in the Bureau’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, which 

include the above purpose of section 

129C, among other things. The Bureau 

concludes that the price-based addition 

to the General QM criteria is necessary 

and proper to achieve this purpose, for 

the reasons described above in part V. 

Finally, the Bureau concludes a pricebased approach 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 DTI ratios or 

alternative measures of ability to pay 

regular expenses after payment of total 

monthly debt. 

43(e)(2)(vi)(A) 

The Bureau’s Proposal 

Proposed § 1026.43(e)(2)(vi)(A) 

provided that, for a first-lien covered 

transaction with a loan amount greater 

than or equal to $109,898 (indexed for 

inflation), the APR may not exceed 

APOR for a comparable transaction as of 

the date the interest rate is set by 2 or 

more percentage points. Thus, under the 

proposal, loans priced at or above the 

proposed 2-percentage-point threshold 

would not have been eligible for QM 

status under § 1026.43(e)(2) (except that, 

as discussed below, the proposal 

provided higher thresholds for loans 

with smaller loan amounts and for 

subordinate-lien transactions). 

In the proposal, the Bureau stated that 

the 2002–2008 time period corresponds 

to a market environment that, in 

general, demonstrates looser, higher-risk 

credit conditions and that ended with 

very high unemployment and falling 

home prices. The Bureau’s analysis set 

forth in Table 5 found direct 

correlations between rate spreads and 

early delinquency rates across all DTI 

ranges reviewed. The proposal stated 

that loans with low rate spreads had 

relatively low early delinquency rates 

even at high DTI levels and the highest 

early delinquency rates corresponded to 

loans with both high rate spreads and 

high DTI ratios. For loans with DTI 

ratios of 41 to 43 percent—the category 

in Table 5 that includes the current DTI 

limit of 43 percent—the early 

delinquency rates reached 16 percent at 

rate spreads including and above 2.25 

percentage points over APOR. At rate 

spreads inclusive of 1.75 through 1.99 

percentage points over APOR—the 

category that is just below the proposed 

2 percentage-point rate-spread 

threshold—the early delinquency rate 

reached 22 percent for DTI ratios of 61 

to 70 percent. At DTI ratios of 41 to 43 

percent and rate spreads inclusive of 

1.75 through 1.99 percentage points 

over APOR, the early delinquency rate 

is 15 percent. 

In the proposal, the Bureau stated 

that, in contrast to Table 5, the 2018 

time period in Table 6 corresponds to a 

market environment that, in general, 

demonstrates tighter, lower-risk credit 

conditions and that featured very low 

unemployment and rising home prices. 

The proposal stated that this more 

recent sample of data provides insight 

into early delinquency rates under postcrisis lending standards for a dataset of 

loans that had not undergone an 

economic downturn. In the 2018 data in 

Table 6, early delinquency rates also 

increased as rate spreads increased 

across each range of DTI ratios analyzed, 

although the overall performance of 

loans in the Table 6 dataset was 

significantly better than those 

represented in Table 5. For loans with 

DTI ratios of 36 to 43 percent—the 

category in Table 6 that includes the 

current DTI limit of 43 percent—early 

delinquency rates reached 3.9 percent 

(at rate spreads of at least 2 percentage 

points). The highest early delinquency 

rate associated with the proposed ratespread threshold (less than 2 percentage 

points over APOR) is 3.2 percent and 

corresponds to loans with the DTI ratios 

of 26 to 35 percent. At the same ratespread threshold, the early delinquency 

rate for the loans with the highest DTI 

ratios is 2.3 percent. The Bureau stated 

that the apparent anomalies in the 

progression of the early delinquency 

rates across DTI ratios at the higher rate 

spread categories in Table 6 are likely 

because there are relatively few loans in 

the 2018 data with the indicated 

combinations of higher rate spreads and 

lower DTI ratios and some creditors 

require that consumers demonstrate 

more compensating factors on higher 

DTI loans. 

In the proposal, the Bureau stated 

that, although in Tables 5 and 6 

delinquency rates rise with rate spread, 

there is no clear point at which 

delinquency rates accelerate and 

comparisons between a high-risk credit 

market (Table 5) and a low-risk credit 

market (Table 6) show substantial 

expansion of early delinquency rates 

during an economic downturn across all 

rate spreads and DTI ratios. Data show 

that, for example, prime loans that 

experience a 0.2 percent early 

delinquency rate in a low-risk market 

might experience a 2 percent early 

delinquency rate in a higher-risk 

market, while subprime loans with a 4.2 

percent early delinquency rate in a lowrisk market might experience a 19 

percent early delinquency rate in a 

higher-risk market. 

The proposal referenced data and 

analyses provided by CoreLogic and the 

Urban Institute, as discussed in part 

V.B.2 above, which the Bureau stated 

also show a strong positive correlation 

of delinquency rates with interest rate 

spreads. The Bureau stated that this 

evidence collectively suggests that 

higher rate spreads—including the 

specific measure of APR over APOR— 


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86362 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

283As discussed above in part V.C, the Bureau 

also received comments both for and against 

increasing the § 1026.43(b)(4) safe harbor threshold 

spread from 1.5 percentage points to 2 percentage 

points. 

284See Kaul & Goodman, supra note 194. 

285The analysis provided by the commenter 

looked at loans that had ever been 60 days or more 

delinquent, rather than 60 or more days delinquent 

during the first two years, which is the standard 

used in the Bureau’s analysis. 

are strongly correlated with early 

delinquency rates. The proposal stated 

the Bureau’s expectation that, for loans 

just below the respective thresholds, a 

pricing threshold of 2 percentage points 

over APOR would generally result in 

similar or somewhat higher early 

delinquency rates relative to the current 

DTI limit of 43 percent. However, the 

proposal stated that Bureau analysis 

shows the early delinquency rate for 

this set of loans is on par with loans that 

have received QM status under the 

Temporary GSE QM loan definition. 

Restricting the sample of 2018 NMDB– 

HMDA matched first-lien conventional 

purchase originations to only those 

purchased and guaranteed by the GSEs, 

the proposal stated that loans with rate 

spreads at or above 2 percentage points 

had an early delinquency rate of 4.2 

percent, higher than the maximum early 

delinquency rates observed for loans 

with rate spreads below 2 percentage 

points in either Table 2 (2.7 percent) or 

Table 6 (3.2 percent). The proposal 

explained that this comparison uses 

2018 data on GSE originations because 

such loans were originated while the 

Temporary GSE QM loan definition was 

in effect and the GSEs were in 

conservatorship. The proposal further 

explained that GSE loans from the 2002 

to 2008 period were originated under a 

different regulatory regime and with 

different underwriting practices (e.g., 

GSE loans more commonly had DTI 

ratios over 50 percent during the 2002 

to 2008 period), and thus may not be 

directly comparable to loans made 

under the Temporary GSE QM loan 

definition. 

In the proposal, the Bureau used 2018 

HMDA data to estimate that 95.8 

percent of conventional purchase loans 

currently meet the criteria to be defined 

as QMs, including under the Temporary 

GSE QM loan definition. The Bureau 

also used 2018 HMDA data to project 

that the proposed 2 percentage-pointover-APOR threshold would result in a 

96.1 percent market share for QMs with 

an adjustment for small loans, as 

discussed below. The Bureau stated that 

creditors may also respond to such a 

threshold by lowering pricing on some 

loans near the threshold, further 

increasing the QM market share. The 

proposal stated that, using the size of 

the QM market as an indicator of access 

to credit, the Bureau expects that a 

pricing threshold of 2 percentage points 

over APOR, in combination with the 

proposed adjustments for small loans, 

would result in an expansion of access 

to credit as compared to the current rule 

including the Temporary GSE QM loan 

definition, particularly as creditors are 

likely to adjust pricing in response to 

the rule, allowing additional loans to 

obtain QM status. The Bureau also 

acknowledged, however, that some 

loans that do not meet the current 

General QM loan definition, but that 

would be General QMs under the 

proposed price-based approach, would 

have been made under other QM 

definitions (e.g., FHA, small-creditor 

QM). Further, the Bureau stated that the 

proposal would result in a substantial 

expansion of access to credit as 

compared to the current rule without 

the Temporary GSE QM loan definition, 

under which only an estimated 73.6 

percent of conventional purchase loans 

would be QMs. 

In the proposal, the Bureau tentatively 

concluded that, in general, a 2 

percentage-point-over-APOR threshold 

would appropriately balance ensuring 

consumers’ ability to repay with 

maintaining access to responsible, 

affordable mortgage credit. The Bureau 

requested comment on the threshold 

amount, as well as comment on 

expected market changes and the 

possibility of adjusting the threshold in 

emergency situations. For the reasons 

discussed below, the Bureau is 

finalizing § 1026.43(e)(2)(vi)(A) with a 

threshold of 2.25 percentage points over 

APOR for transactions with a loan 

amount greater than or equal to 

$110,260 (indexed for inflation). 

Comments Received 

The Bureau received several 

comments concerning the proposed 2- 

percentage-point threshold for General 

QM eligibility under 

§ 1026.43(e)(2)(vi)(A).283 Various 

commenters supported finalizing the 

proposed threshold or raising it by some 

unspecified amount. A GSE supported 

the proposed 2-percentage-point 

threshold to both continue access to 

affordable credit and ensure consumers’ 

ability to repay. Another GSE supported 

the 2-percentage-point threshold and 

stated it was equally supportive of 

increasing the threshold by an 

unspecified amount. Similarly, an 

industry commenter stated that it does 

not oppose increasing the threshold by 

some unspecified amount. 

Some comments, including one from 

an academic commenter and a joint 

comment from consumer advocates, 

generally opposed a price-based 

approach but also stated concerns 

specifically regarding the proposed 2- 

percentage-point threshold for QM 

eligibility under § 1026.43(e)(2)(vi)(A). 

Citing an Urban Institute analysis that 

was also cited in the proposal,284 the 

comments stated that, among loans with 

rate spreads of 1.51 to 2.00 percentage 

points originated from 1995 through 

2008, even 30-year fixed-rate, fully 

documented and fully amortizing loans 

had high delinquency rates—especially 

those originated during periods of 

greater rate spread compression. Citing 

General QM Proposal Tables 1 and 3 

regarding 2002–2008 first-lien purchase 

originations (i.e., reproduced as Tables 

1 and 3 above), the comments also 

stated that the 13 percent early 

delinquency rate for loans priced 1.75 to 

1.99 percentage points above APOR is 

more than double the 6 percent early 

delinquency rate for loans with DTI 

ratios of 41 to 43 percent—and is almost 

double the 7 percent early delinquency 

rate for loans with DTI ratios of 46 to 48 

percent. 

A research center specifically 

recommended increasing the General 

QM eligibility threshold to 2.5 

percentage points to balance ability to 

repay with access to credit. The 

commenter stated that, based on Fannie 

Mae and Black Knight McDash data, a 

2.5-percentage-point threshold would 

increase the delinquency rate 285 but 

nonetheless the delinquency rate would 

remain low relative to delinquency rates 

experienced in the past 20 years. The 

research center also stated that, based 

on 2019 HMDA data, a 2.5-percentagepoint threshold would cause 32,044 

more loans to be QM-eligible than a 2- 

percentage-point threshold. The 

commenter further stated that FHA’s 

QM rule does not limit pricing for 

rebuttable presumption QMs and thus 

increasing the Bureau’s threshold under 

§ 1026.43(e)(2)(vi)(A) would create a 

more level playing field and increase 

consumer choice. 

An individual commenter generally 

supported proposed 

§ 1026.43(e)(2)(vi)(A) but suggested 

incrementally increasing the General 

QM eligibility threshold to as high as 

2.75 percentage points for transactions 

with lower points and fees. The 

commenter stated that the approach 

would provide more flexibility and help 

consumers avoid paying upfront points 

and fees. 

Several commenters recommended 

increasing the General QM eligibility 

threshold to 3 percentage points. A joint 

comment from consumer advocate and 


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286 Davis et al., supra note 179. 

287 85 FR 50944, 50948 (Aug. 19, 2020). 288The Bureau stated in the January 2013 Final 

Rule that it believed a significant share of mortgages 

would be made under the general ATR standard. 78 

FR 6408, 6527 (Jan. 30, 2013). However, the 

Assessment Report found that a robust market for 

non-QM loans above the 43 percent DTI limit has 

not materialized as the Bureau had predicted and, 

therefore, there is limited capacity in the non-QM 

market to provide access to credit after the 

expiration of the Temporary GSE QM loan 

definition. Assessment Report, supra note 63, at 

198. As described above, 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 QM lending space. The Bureau acknowledges 

that the slow development of the non-QM market 

and the recent economic disruptions associated 

with the COVID–19 pandemic may significantly 

hinder its development in the near term. 

289Assessment Report, supra note 63, at 10–11, 

117, 131–47. 

290The Bureau also acknowledges that Table 5 

shows that for loans with DTI ratios of 61–70 in the 

2002–2008 data, the early delinquency rates were 

26 percent for loans priced 2.00 to 2.24 percentage 

Continued 

industry groups included some 

signatories recommending a 3- 

percentage-point threshold and no 

signatories opposing it. Another joint 

comment from consumer advocate and 

industry groups supported a 3- 

percentage-point threshold to balance 

ability to repay with access to credit. 

The latter joint comment stated that, 

based on Fannie Mae data and 

accounting for current risk-based 

mortgage insurance premiums, a 3- 

percentage-point threshold would 

increase the early delinquency rate but 

nonetheless the delinquency rate would 

be low relative to the Great Recession. 

Citing an FHFA working paper that was 

also cited by the General QM 

Proposal,286 the joint comment further 

stated that loans with non-QM 

features—including interest-only loans, 

ARM loans that combined teaser rates 

with subsequent large jumps in 

payments, negative amortization loans, 

and loans made with limited or no 

documentation of the borrower’s income 

or assets—accounted for about half of 

the rise in risk leading up to the 2008 

financial crisis and subsequent passage 

of the Dodd-Frank Act. The joint 

comment stated that the Bureau should 

promote more consumers receiving the 

important benefits of the Dodd-Frank 

Act’s QM product restrictions— 

including lower-income and minority 

consumers that would otherwise be 

disproportionally excluded—by 

increasing the threshold for QM 

eligibility under § 1026.43(e)(2)(vi)(A). 

The Bureau also received comments— 

including one from a research center 

and a joint comment from consumer 

advocate and industry groups— 

recommending an increase in the 

General QM pricing threshold to 

account for possible future rate spread 

widening in the market, as also 

discussed above in part V.C with respect 

to the safe harbor threshold. The Bureau 

also received a joint comment from 

consumer advocates that generally 

opposed a price-based approach but also 

stated that the Bureau should not 

increase the General QM pricing 

threshold in future emergency situations 

without notice-and-comment 

rulemaking. 

The Final Rule 

For the reasons discussed below, the 

Bureau is adopting § 1026.43(e)(2)(vi)(A) 

with a threshold of 2.25 percentage 

points over APOR for transactions with 

a loan amount greater than or equal to 

$110,260 (indexed for inflation). The 

Bureau concludes that, for most firstlien covered transactions, a 2.25 

percentage point pricing threshold 

strikes the best balance between 

ensuring consumers’ ability to repay 

and ensuring access to responsible, 

affordable mortgage credit. The Bureau 

is adopting § 1026.43(e)(2)(vi)(A) with a 

$110,260 loan amount threshold for 

consistency with the Bureau’s recentlyissued final rule that adjusted for 

inflation the related $109,898 threshold 

in comment 43(e)(3)(ii)–1.287 As 

discussed below, the final rule provides 

higher thresholds for loans with smaller 

loan amounts and for subordinate-lien 

transactions. The final rule provides an 

increase from the proposed thresholds 

for some small manufactured housing 

loans to ensure continued access to 

credit. 

The Bureau concludes that a General 

QM eligibility threshold lower than 2.25 

percentage points would unduly limit 

some consumers to non-QM or FHA 

loans, which generally have materially 

higher costs, or would unduly result in 

some consumers not being able to obtain 

a loan at all despite their ability to 

afford one, given the current lack of a 

robust non-QM market.288 As discussed 

in part V.B.5 above, Table 7A shows 

that 96.3 percent of 2018 conventional 

first-lien purchase originations would 

have been QMs under this revised ATR/ 

QM Rule, as compared to a 94.7 percent 

share under the existing ATR/QM Rule, 

including the Temporary GSE QM loan 

definition. As discussed in the Bureau’s 

Dodd-Frank Act section 1022(b) analysis 

below, among loans that fall outside the 

current General QM loan definition 

because they have a DTI ratio above 43 

percent, the Bureau estimates that 

959,000 of these conventional loans in 

2018 would fall within this final rule’s 

General QM loan definition. The Bureau 

concludes that some consumers with 

those conventional loans with DTI ratios 

above 43 percent could have instead 

obtained non-QM or FHA loans, which 

generally have materially higher costs, 

but others would not have obtained a 

loan at all. For example, based on 

application-level data obtained from 

nine large lenders, the Assessment 

Report found that the January 2013 

Final Rule eliminated between 63 and 

70 percent of non-GSE eligible home 

purchase loans with DTI ratios above 43 

percent.289 The Bureau concludes that a 

2.25 percentage point General QM 

eligibility threshold helps address those 

access-to-credit concerns—including 

concerns related to certain ARMs and 

manufactured housing loans discussed 

below—while striking an appropriate 

balance with ability-to-repay concerns. 

A 2.25 percentage point pricing 

threshold for QM eligibility under 

§ 1026.43(e)(2)(vi)(A) is also supported 

by the Bureau’s conclusion that the 

Dodd-Frank Act QM product 

restrictions contribute to ensuring that 

consumers have the ability to repay 

their loans and are important for 

maintaining and expanding access to 

responsible, affordable mortgage credit. 

The Bureau concludes that loans with 

non-QM features—including interestonly loans, negative amortization loans, 

and loans made with limited or no 

documentation of the borrower’s income 

or assets—had a substantial negative 

effect on consumers’ ability to repay 

leading up to the 2008 financial crisis 

and subsequent passage of the DoddFrank Act. The Bureau concludes that 

promoting access to more QMs with the 

important benefits of the Act’s QM 

product restrictions will help ensure 

consumers’ ability to repay. 

Furthermore, for General QMs priced 

greater than or equal to 1.5 but less than 

2.25 percentage points above APOR, 

consumers would also be afforded the 

opportunity to rebut the creditor’s QM 

presumption of compliance. 

In response to commenters who stated 

that the early delinquency rate for the 

proposed 2-percentage-point threshold 

would be too high to justify a QM 

presumption of compliance, the Bureau 

acknowledges that Table 1 for 2002– 

2008 first-lien purchase originations 

shows a 14 percent early delinquency 

rate for loans priced 2.00 to 2.24 

percentage points above APOR, as 

compared to a 13 percent early 

delinquency rate for loans priced 1.75 to 

1.99 percentage points above APOR and 

a 12 percent early delinquency rate for 

loans priced 1.50 to 1.74 percentage 

points above APOR.290 The comparable 


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86364 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

points above APOR, relative to 22 percent for loans 

priced 1.75 to 2.00 percentage points above APOR. 

291Similarly, Table 6 shows that for the DTI ratios 

with the highest early delinquency rates (DTI ratios 

of 26–35), the early delinquency rates were 4.4 

percent for loans priced 2.00 or more percentage 

points over APOR, compared to 3.2 percent for 

loans priced 1.50 to 1.99 percentage points over 

APOR. 

292Assessment Report, supra note 63, section 5.5, 

at 187. 

293As discussed in part V.B.5 above, Table 7A 

shows that 96.3 percent of 2018 conventional firstlien purchase originations would have been QMs 

under this revised ATR/QM Rule including 

§ 1026.43(e)(2)(vi)(A) with a threshold of 2.25 

percentage points over APOR. Table 7A shows a 

96.6 percent share if the threshold were instead 

increased to 2.5 percentage points over APOR. 

294 85 FR 41716, 41732 n.190 (July 10, 2020). 

295On August 19, 2020, the Bureau issued a final 

rule adjusting the loan amounts for the limits on 

points and fees under § 1026.43(e)(3)(i), based on 

the annual percentage change reflected in the CPI– 

U in effect on June 1, 2020. 85 FR 50944 (Aug. 19, 

2020). To ensure that the loan amounts for 

§ 1026.43(e) remain synchronized, the Bureau is 

finalizing this rule with a threshold of $66,156, 

rather than a threshold of $65,939, and $110,260, 

rather than a threshold of $109,898. 

296As noted above, and discussed in more detail 

below, the Bureau is increasing the loan amounts 

specified in § 1026.43(e)(2)(vi)(A) through (F) 

because the new adjustments for 2021 have been 

published. See 85 FR 50944 (Aug. 19, 2020). 

early delinquency rates for 2018 loans 

from Table 2 also show a higher early 

delinquency rate for loans priced 2.00 

percentage points or more above APOR 

compared to loans priced 1.50 to 1.99 

percentage points above APOR: 4.2 

percent versus 2.7 percent.291 However, 

Bureau analysis shows the early 

delinquency rate for this set of loans is 

on par with loans that have received 

QM status under the Temporary GSE 

QM loan definition. Specifically, when 

restricting the sample of 2018 NMDB– 

HMDA matched first-lien conventional 

purchase originations to only those 

purchased and guaranteed by the GSEs, 

loans with rate spreads at or above 2 

percentage points had an early 

delinquency rate of 4.2 percent. As 

explained above, this comparison uses 

2018 data because such loans were 

originated while the Temporary GSE 

QM loan definition was in effect and the 

GSEs were in conservatorship, whereas 

GSE loans from the 2002 to 2008 period 

were originated under a different 

regulatory regime and with different 

underwriting practices that may not be 

directly comparable to loans made 

under the Temporary GSE QM loan 

definition. 

In response to commenters, and as 

discussed above in part V.C.4, the 

Bureau concludes that it would be 

premature at this point to increase the 

QM safe harbor threshold based on 

possible future spread widening both 

because of uncertainty regarding effects 

on APOR itself as well as insufficient 

evidence of a significant access-to-credit 

difference between safe harbor and 

rebuttable presumption QMs. But for the 

General QM eligibility threshold under 

§ 1026.43(e)(2)(vi)(A), notwithstanding 

the uncertainty regarding effects on 

APOR itself, the Bureau concludes that 

a robust non-QM market has not yet 

emerged and, thus, loans that exceed 

that threshold may not be available to 

some consumers, even though they 

would have been within the consumer’s 

ability to repay. Thus, the Bureau 

concludes that (in addition to the 

reasons above) future spread widening 

also supports the 2.25 percentage point 

pricing threshold because future spread 

widening poses a greater potential 

access-to-credit concern for the General 

QM eligibility threshold under 

§ 1026.43(e)(2)(vi)(A) than for the safe 

harbor threshold under § 1026.43(b)(4), 

if levels of non-QM lending remain low. 

This conclusion is consistent with the 

Bureau’s findings in the Assessment 

Report, which suggest that, while the 

safe harbor threshold of 1.5 percentage 

points has not constrained lenders from 

originating rebuttable presumption 

QMs, only a modest amount of non-QM 

lending has occurred since the January 

2013 Final Rule took effect.292

Moreover, the Bureau will monitor the 

market and take action as needed to 

maintain the best balance between 

consumers’ ability to repay and access 

to responsible, affordable mortgage 

credit. 

The Bureau concludes that it has 

insufficient evidence as to whether a 

threshold higher than 2.25 percentage 

points would strike the best balance 

with ability-to-repay concerns, 

particularly given the limited expected 

access to credit gains from increasing 

the threshold higher than 2.25 

percentage points.293 While the 14 

percent early delinquency rate in Table 

1 for loans priced 2.00 to 2.24 

percentage points above APOR is the 

same early delinquency rate as for loans 

priced 2.25 percentage points or more 

above APOR, all loans with rate spreads 

of 2.25 percentage points or more 

needed to be grouped to ensure 

sufficient sample size for reliable 

analysis of the 2002–2008 data.294

43(e)(2)(vi)(B)–(F) 

Thresholds for Smaller Loans and 

Subordinate-Lien Transactions 

The Bureau proposed to establish 

higher pricing thresholds for smaller 

loans. Under the proposal, smaller loans 

priced at or above the proposed 

thresholds would not have been eligible 

for QM status under § 1026.43(e)(2). 

Specifically, proposed 

§ 1026.43(e)(2)(vi)(B) provided that, for 

first-lien covered transactions with loan 

amounts greater than or equal to 

$65,939 but less than $109,898, the APR 

may not exceed APOR for a comparable 

transaction as of the date the interest 

rate is set by 3.5 or more percentage 

points.295 Proposed 

§ 1026.43(e)(2)(vi)(C) provided that, for 

first-lien covered transactions with loan 

amounts less than $65,939, the APR 

may not exceed the APOR for a 

comparable transaction as of the date 

the interest rate is set by 6.5 or more 

percentage points. 

The Bureau also proposed to establish 

higher thresholds for subordinate-lien 

transactions. Under the proposal, 

subordinate-lien transactions priced at 

or above the proposed thresholds would 

not have been eligible for QM status 

under § 1026.43(e)(2). Specifically, 

proposed § 1026.43(e)(2)(vi)(D) provided 

that, for subordinate-lien covered 

transactions with loan amounts greater 

than or equal to $65,939, the APR may 

not exceed the APOR for a comparable 

transaction as of the date the interest 

rate is set by 3.5 or more percentage 

points. Proposed § 1026.43(e)(2)(vi)(E) 

provided that, for subordinate-lien 

covered transactions with loan amounts 

less than $65,939, the APR may not 

exceed the APOR for a comparable 

transaction as of the date the interest 

rate is set by 6.5 or more percentage 

points. 

The proposal also provided that the 

loan amounts specified in 

§ 1026.43(e)(2)(vi)(A) through (E) would 

be adjusted annually for inflation based 

on changes in CPI–U. Specifically, the 

Bureau proposed adjusting the loan 

amounts in § 1026.43(e)(2)(vi) annually 

on January 1 by the annual percentage 

change in the CPI–U that was reported 

on the preceding June 1. The Bureau 

proposed publishing adjustments in 

new comment 43(e)(2)(vi)–3 after the 

June figures became available each year. 

For the reasons discussed below, the 

Bureau is finalizing 

§ 1026.43(e)(2)(vi)(B) through (E) as 

proposed, except that proposed 

§ 1026.43(e)(2)(vi)(D) has been 

redesignated as § 1026.43(e)(2)(vi)(E) 

and proposed § 1026.43(e)(2)(vi)(E) has 

been redesignated as 

§ 1026.43(e)(2)(vi)(F) because the 

Bureau is finalizing a threshold for 

smaller manufactured housing loans in 

§ 1026.43(e)(2)(vi)(D).296 The Bureau is 

also finalizing two additional comments 

to clarify terms and phrases used in 

§ 1026.43(e)(2)(vi)(D). Specifically, 

comment 43(e)(2)(vi)–5 clarifies that the 

term ‘‘manufactured home,’’ as used in 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86365 

297 85 FR 41716, 41733 (July 10, 2020) (showing 

early delinquency rates for 2002–2008 first-lien 

purchase originations in NMDB data categorized 

according to both their DTI ratios and their 

approximate rate spreads). 

298Mike Baker & Daniel Wagner, The mobilehome trap: How a Warren Buffet empire preys on 

the poor, The Seattle Times (Apr. 2, 2015), https:// 

www.seattletimes.com/business/real-estate/themobile-home-trap-how-a-warren-buffett-empirepreys-on-the-poor/#:∼:text=Special%20Reports- 

,The%20mobile%20home%20trap%3A%20

How%20a%20Warren%20Buffett,empire%

20preys%20on%20the%20poor&

text=Billionaire%20philanthropist%20

Warren%20Buffett%20controls,loans%20and%20

rapidly%20depreciating%20homes. 

§ 1026.43(e)(2)(vi)(D), means any 

residential structure as defined under 

HUD regulations establishing 

manufactured home construction and 

safety standards (24 CFR 3280.2). The 

comment further clarifies that modular 

or other factory-built homes that do not 

meet the HUD code standards are not 

manufactured homes for purposes of 

§ 1026.43(e)(2)(vi)(D). Comment 

43(e)(2)(vi)–6 provides that the 

threshold in § 1026.43(e)(2)(vi)(D) 

applies to first-lien covered transactions 

less than $110,260 (indexed for 

inflation) that are secured by a 

manufactured home and land, or by a 

manufactured home only. 

Comments Received 

The Bureau received several 

comments from consumer advocates, 

the mortgage industry, research centers, 

and others in response to the proposed 

pricing thresholds for smaller loans and 

subordinate-lien transactions. While 

some commenters supported the 

Bureau’s proposed thresholds, others 

expressed various concerns, as 

described below. 

Pricing thresholds for smaller loans. 

Consumer advocates and industry 

commenters offered differing 

viewpoints on whether the Bureau 

should consider the creditor’s costs in 

developing the thresholds for smaller 

loans. Consumer advocate commenters 

noted that the statute requires the 

Bureau to consider the consumer’s 

ability to repay when defining General 

QM; thus, in developing thresholds, the 

Bureau should not consider the 

creditor’s costs or profit margins, which 

the commenter perceived was the 

Bureau’s basis for developing higher 

thresholds for smaller loans, absent a 

showing that the available credit is 

responsible and affordable. Conversely, 

industry commenters suggested that the 

Bureau should consider the creditor’s 

costs in developing the thresholds for 

smaller loans, given the impact these 

costs have on the price of these loans, 

specifically manufactured housing 

loans. For example, these commenters 

noted that, despite having smaller loan 

amounts, manufactured housing loans, 

including chattel loans, tend to have the 

same or similar origination and 

servicing costs as traditional mortgages. 

They also asserted that, unlike 

traditional mortgages, manufactured 

housing loans, including chattel loans, 

lack access to secondary market funding 

and to private mortgage insurance to 

offset credit risk and protect against 

potential losses. Overall, industry 

commenters stated that the thresholds 

for smaller loans should provide 

creditors with the ability to recover their 

costs for originating and servicing 

smaller loans, and still originate 

qualified mortgages. 

The Bureau also received comments 

about the impact of the proposed 

thresholds on low- to moderate-income 

and minority consumers and on land 

installment contracts. With respect to 

the former, one large credit union 

expressed concern about the impact the 

proposed loan amount thresholds for 

smaller loans would have on these 

consumers given the rise in home 

prices. In addition, one State trade 

association observed that some loans 

greater than $65,939 exceeded the 

proposed pricing thresholds due to 

various risk factors, such as high LTV 

ratios or negative credit history, and that 

it was unclear whether these risk factors 

were more common among low- to 

moderate-income and minority 

consumers. With respect to land 

installment contracts, consumer 

advocate commenters asserted that 

under the Bureau’s proposed thresholds 

for smaller loans, land installment 

contracts would newly be eligible for 

QM status, which would impede 

consumer lawsuits against creditors. 

Data to support the thresholds for 

smaller loans. Consumer advocate 

commenters recommended that the 

Bureau further refine the data used to 

support the thresholds for smaller loans. 

Specifically, they recommended that the 

Bureau refine the data to include the 

volume of loans in each rate-spread 

range, loan performance data using 

incremental rate-spread ranges instead 

of cumulative rate-spread ranges, and an 

analysis that separates chattel loans 

from real estate-secured mortgages. 

A few consumer advocate 

commenters underscored the need for 

refining the data by analyzing the early 

delinquency rates shown in General QM 

Proposal Table 5,297 which, according to 

these commenters, indicate that the 

proposed thresholds for smaller loans 

would harm vulnerable consumers. 

Specifically, these commenters noted 

that for loans priced 2.25 or more 

percentage points above APOR and with 

a DTI ratio greater than 26 percent, early 

delinquency rates were 10 percent or 

higher; and for similarly priced loans 

with DTI ratios between 40 and 50 

percent, early delinquency rates were 

between 16 to 19 percent. These 

commenters also noted that General QM 

Proposal Table 5 did not show the early 

delinquency rate for 2002–2008 firstlien purchase originations in the NMDB 

at the proposed thresholds for smaller 

loans (3.5 or 6.5 percentage points above 

APOR). These commenters 

recommended that the Bureau make 

available for comment a revised version 

of General QM Proposal Table 5 that 

shows the historical early delinquency 

rates for first-lien purchase originations 

categorized by DTI and rate spreads 

greater than 2.25 percentage points 

above APOR, before it presumes ability 

to repay for consumers taking out loans 

with higher rate spreads. 

Aside from noting issues with the 

Bureau’s data, consumer advocate 

commenters also noted that the limited 

public data appears to suggest that 

smaller loans do not perform well, 

citing a newspaper article on 

manufactured housing loans, which 

described features unique to 

manufactured housing loans and 

reported that 28 percent of chattel loans 

fail to perform, as an example.298

QM share of manufactured housing 

loans. A few industry commenters 

asserted that a substantial share of 

manufactured housing loans qualifying 

as General QMs under the current 

definition would fail to qualify as 

General QMs under the proposed 

thresholds. Some of these commenters 

surveyed their members to obtain 

information to estimate the decline in 

shares of manufactured housing loans 

that would meet the standards to be 

General QMs. For example, members of 

a national manufactured housing trade 

association stated that they expect up to 

50 percent of their manufactured 

housing loans would lose General QM 

status under the proposed thresholds for 

smaller loans. Members of a trade group 

representing credit unions likewise 

stated that they expect up to 90 percent 

of their manufactured housing loans 

would lose General QM status. Other 

commenters used 2019 HMDA data to 

estimate the decline in shares of 

manufactured housing loans that would 

be eligible for General QM status. For 

instance, while comparing data from 

General QM Proposal Table 7 with 2019 

HMDA data, a non-depository 

manufactured housing creditor asserted 

that, compared to first-lien 

manufactured housing loans, the 

Bureau’s proposed thresholds would 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
86366 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

299 85 FR 41716, 41736 (July 10, 2020) (showing 

the share of 2018 first-lien conventional purchase 

loans under various General QM loan definitions). 

300The non-depository manufactured housing 

creditor specifically discussed the impact of a 

manufactured housing loan being subject to TILA’s 

appraisal requirements for higher-priced mortgages 

because, without QM status, these loans would not 

be eligible for the exemption from these 

requirements under 12 CFR 1026.35(c)(2)(i). 

301 85 FR 41716, 41760 (July 10, 2020) (analyzing 

credit characteristics and loan performance for 

subordinate-lien transactions at various rate spreads 

and loan amounts (adjusted for inflation) using 

HMDA and Y–14M data). 

302The Bureau’s decisions to adopt basic pricing 

thresholds of 1.5 and 2.25 percentage points above 

APOR and to supplement them with higher pricing 

thresholds for smaller loans, for smaller loans 

secured by a manufactured home, and for 

subordinate-lien transactions are each independent 

of one another. 

303 Id. at 41757 n.270. 

304 85 FR 50944 (Aug. 19, 2020). 

allow for far more first-lien 

conventional purchase loans for sitebuilt housing to be eligible for General 

QM status.299

To prevent a decline in the share of 

manufactured housing loans eligible for 

General QM status, commenters 

recommended the following 

adjustments or alternatives to the 

Bureau’s proposed thresholds for 

smaller loans. One industry commenter 

recommended that the Bureau increase 

the pricing threshold for smaller loans 

but did not provide specific thresholds. 

Two other industry commenters 

recommended increasing the loan 

amount thresholds instead, from 

$65,939 to $110,000 and from $109,898 

to $210,000. One of these commenters 

added that the Bureau should set these 

thresholds either for all loans or for only 

manufactured housing loans, while the 

other added that 91 percent of the firstlien manufactured housing loans 

originated in 2019 would have been 

eligible for General QM status if these 

higher loan amount thresholds were in 

place. One of these commenters also 

recommended a complementary DTI 

approach for manufactured housing 

loans. Under this approach, a 

manufactured housing loan would be 

eligible for General QM status by either 

satisfying the pricing thresholds or 

having a DTI ratio no higher than 45 

percent, when determined in 

accordance with GSE or Federal agency 

underwriting guidelines. Lastly, a 

manufacturing housing creditor 

recommended incorporating HOEPA’s 

APR thresholds for high-cost mortgages 

into a definition of General QM for 

manufactured housing loans. 

Specifically, the creditor recommended 

that a first-lien covered transaction 

secured by a manufactured home would 

have a conclusive presumption of 

compliance if the APR at consummation 

did not exceed the APOR by more than 

1.5 percentage points; a rebuttable 

presumption of compliance if the APR 

at consummation did not exceed the 

APOR by 6.5 percentage points; and a 

rebuttable presumption of compliance if 

the transaction was a first-lien, personal 

property loan under $50,000 and the 

APR at consummation did not exceed 

the APOR by 8.5 percentage points. To 

underscore the importance of 

preventing an estimated decline in the 

share of manufactured housing loans 

that are General QMs, these commenters 

asserted that, without General QM 

status, creditors may either extend 

manufactured housing loans as more 

expensive non-QMs, or not extend these 

loans at all.300

Consumer advocate commenters, 

however, asserted that creditors offering 

manufactured housing loans could 

adjust the price of these loans to fit 

within the Bureau’s proposed 

thresholds, noting that creditors were 

able to price manufactured housing 

loans below HOEPA’s APR thresholds 

for high-cost mortgages after those 

thresholds were adopted. Consumer 

advocate commenters also added that a 

high threshold would encourage 

exploitative lending right under the 

threshold. 

QM share of subordinate-lien 

transactions. A few industry 

commenters noted that a sizable share of 

subordinate-lien transactions qualifying 

as General QMs under the current 

definition would fail to qualify as 

General QMs under the proposed 

thresholds. 

To prevent the estimated decline in 

the share of subordinate-lien 

transactions that would obtain QM 

status under the proposed thresholds, 

one industry commenter recommended 

that the Bureau retain the current 

General QM loan definition for higherpriced mortgage loans, increase the 

pricing threshold for subordinate-lien 

transactions while using the same 

proposed loan amount thresholds used 

for first-lien transactions, or both. Under 

the commenter’s second 

recommendation, a subordinate-lien 

transaction would qualify as a General 

QM if the APR at consummation does 

not exceed the APOR by 5 percentage 

points for transactions with a loan 

amount greater than or equal to 

$109,898; by 5.5 percentage points for 

transactions with a loan amount greater 

than or equal to $65,939 but less than 

$109,898; and by 8.5 percentage points 

for transactions with a loan amount less 

than $65,939. The commenter pointed 

to General QM Proposal Table 10 to 

demonstrate that delinquency rates did 

not materially differ under these 

recommended thresholds.301

The Final Rule 

The Bureau is adopting the proposed 

pricing thresholds for smaller loans and 

subordinate-lien transactions. However, 

as described below, the Bureau is 

finalizing an additional, higher pricing 

threshold for smaller loans secured by a 

manufactured home. In developing 

pricing thresholds under the General 

QM loan definition for smaller loans, 

smaller loans secured by a 

manufactured home, and subordinatelien transactions, the Bureau balanced 

considerations related to ensuring 

consumers’ ability to repay with 

maintaining access to responsible, 

affordable mortgage credit.302

The final rule amends § 1026.43 by 

revising § 1026.43(e)(2)(vi) to provide 

higher pricing thresholds to define 

General QM for smaller loans, smaller 

loans secured by a manufactured home, 

and subordinate-lien transactions. The 

Bureau is also adjusting the loan 

amounts specified in 

§ 1026.43(e)(2)(vi)(A) through (F). As 

discussed in the proposal, the Bureau 

proposed loan amount thresholds of 

$65,939 and $109,898, because those 

thresholds aligned with certain 

thresholds for the limits on points and 

fees, as updated for inflation, in 

§ 1026.43(e)(3)(i) and the associated 

commentary.303 On August 19, 2020, the 

Bureau issued a final rule adjusting the 

loan amounts for the limits on points 

and fees under § 1026.43(e)(3)(i), based 

on the annual percentage change 

reflected in the CPI–U in effect on June 

1, 2020.304 To ensure that the loan 

amounts for § 1026.43(e) remain 

synchronized, the Bureau is finalizing 

the loan amount thresholds specified in 

§ 1026.43(e)(2)(vi)(A) through (F) with a 

threshold of $66,156, rather than a 

threshold of $65,939, and $110,260, 

rather than a threshold of $109,898. As 

clarified in comment 43(e)(2)(vi)–3, 

these amounts shall be adjusted 

annually on January 1 by the annual 

percentage change in the CPI–U that 

was reported on the preceding June 1. 

Final § 1026.43(e)(2)(vi)(B) provides 

that, for first-lien covered transactions 

with loan amounts greater than or equal 

to $66,156 (indexed for inflation) but 

less than $110,260 (indexed for 

inflation), the APR may not exceed 

APOR for a comparable transaction as of 

the date the interest rate is set by 3.5 or 

more percentage points. Section 

1026.43(e)(2)(vi)(C) provides that, for 

first-lien covered transactions with loan 

amounts less than $66,156 (indexed for 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86367 

305See, e.g., 12 CFR 1026.35(c)(1)(iii). 

306See 78 FR 6408, 6528 (Jan. 30, 2013). 

307See Bureau of Labor and Statistics, Historical 

Consumer Price Index for All Urban Consumers 

Continued 

inflation), the APR may not exceed 

APOR for a comparable transaction as of 

the date the interest rate is set by 6.5 or 

more percentage points. Section 

1026.43(e)(2)(vi)(D) provides that, for 

first-lien covered transactions secured 

by a manufactured home with loan 

amounts less than $110,260 (indexed for 

inflation), the APR may not exceed 

APOR for a comparable transaction as of 

the date the interest rate is set by 6.5 or 

more percentage points. Section 

1026.43(e)(2)(vi)(E) provides that, for 

subordinate-lien covered transactions 

with loan amounts greater than or equal 

to $66,156 (indexed for inflation), the 

APR may not exceed APOR for a 

comparable transaction as of the date 

the interest rate is set by 3.5 or more 

percentage points. Section 

1026.43(e)(2)(vi)(F) provides that, for 

subordinate-lien covered transactions 

with loan amounts less than $66,156 

(indexed for inflation), the APR may not 

exceed APOR for a comparable 

transaction as of the date the interest 

rate is set by 6.5 or more percentage 

points. 

The Bureau is also adding two 

comments to provide additional 

clarification on terms and phrases used 

in § 1026.43(e)(2)(vi)(D). Comment 

43(e)(2)(vi)–5 clarifies that the term 

‘‘manufactured home,’’ as used in 

§ 1026.43(e)(2)(vi)(D), means any 

residential structure as defined under 

HUD regulations establishing 

manufactured home construction and 

safety standards (24 CFR 3280.2). 

Modular or other factory-built homes 

that do not meet the HUD code 

standards are not manufactured homes 

for purposes of § 1026.43(e)(2)(vi)(D). 

The Bureau is aligning the definition of 

‘‘manufactured home’’ with the HUD 

standards to maintain consistency with 

the definition the Bureau uses 

elsewhere in Regulation Z.305 Comment 

43(e)(2)(vi)–6 provides that the 

threshold in § 1026.43(e)(2)(vi)(D) 

applies to first-lien covered transactions 

less than $110,260 (indexed for 

inflation) that are secured by a 

manufactured home and land, or by a 

manufactured home only. 

Smaller loans. The Bureau is adopting 

higher thresholds for smaller loans 

because it is concerned that loans with 

smaller loan amounts are typically 

priced higher than loans with larger 

loan amounts, even though a consumer 

with a smaller loan may have similar 

credit characteristics and likelihood of 

early delinquency, which the Bureau 

uses as a proxy for measuring whether 

a consumer had a reasonable ability to 

repay at the time the loan was 

consummated. As discussed in the 

General QM Proposal—and noted by 

commenters supporting the proposed 

higher thresholds for smaller loans— 

many of the creditors’ costs for a 

transaction may be the same or similar 

between smaller loans and larger loans. 

For creditors to recover their costs for 

originating and servicing smaller loans, 

they may have to charge higher interest 

rates or higher points and fees as a 

percentage of the loan amount than they 

would for comparable larger loans. As a 

result, smaller loans tend to have higher 

APRs than larger loans to consumers 

with similar credit characteristics and 

who may have a similar ability to repay. 

The Bureau concludes that its 

observation of the components of 

creditors’ costs, in this limited regard, is 

consistent with its statutory obligations. 

As stated above, 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 those 

regulations are necessary or proper to 

ensure that responsible, affordable 

credit remains available to consumers in 

a manner consistent with the purposes 

of TILA section 129C. Here, as further 

explained below, the Bureau’s analysis 

indicates that consumers who take out 

smaller loans with APRs within higher 

thresholds may have similar credit 

characteristics as consumers who take 

out larger loans. The Bureau’s analysis 

also indicates that smaller loans with 

APRs within higher thresholds may 

have comparable levels of early 

delinquencies as larger loans within 

lower thresholds. However, as 

explained further below, the Bureau’s 

analysis of delinquency levels for 

smaller loans, compared to larger loans, 

does not appear to indicate a threshold 

at which delinquency levels 

significantly accelerate. Nevertheless, 

the Bureau concludes that the finalized 

thresholds for smaller loans best ensure 

that responsible, affordable credit 

remains available to consumers taking 

out smaller loans, while also helping to 

ensure that the risks are limited. The 

Bureau thus concludes that smaller 

loans that are higher-priced loans under 

§ 1026.43(b)(4) but are priced below the 

applicable thresholds in 

§ 1026.43(e)(2)(vi)(B) or (C) will receive 

a rebuttable presumption of compliance 

with the ATR requirements. 

Moreover, adopting the same 

threshold of 2.25 percentage points 

above APOR for all loans could 

disproportionately prevent smaller 

loans with comparable levels of early 

delinquencies as larger loans, 

potentially including a disproportionate 

number of loans to minority consumers, 

from being originated as General QMs. 

The Bureau’s analysis of 2018 HMDA 

data found that 3.7 percent of site-built 

loans to minority consumers are priced 

2.25 percentage points or more over 

APOR, but 2.7 percent of site-built loans 

to non-Hispanic White consumers are 

priced 2.25 percentage points or more 

over APOR. While some loans may be 

originated under other QM definitions 

or as non-QM loans, those loans may 

cost materially more to consumers, and 

some loans may not be originated at all. 

As discussed in part V, the non-QM 

market has been slow to develop, and 

the negative impact on the non-QM 

market from the disruptions caused by 

the COVID–19 pandemic raises further 

concerns about the capacity of the nonQM market to provide consumers with 

access to credit through such loans. 

The Bureau also notes that, in the 

Dodd-Frank Act, Congress provided for 

additional pricing flexibility for 

creditors making smaller loans, allowing 

smaller loans to include higher points 

and fees while still meeting the QM 

definition. TILA section 

129C(b)(2)(A)(vi) defines a QM as a loan 

for which, among other things, the total 

points and fees payable in connection 

with the loan do not exceed 3 percent 

of the total loan amount. However, TILA 

section 129C(b)(2)(D) requires the 

Bureau to prescribe rules adjusting the 

points-and-fees limits for smaller loans. 

In the January 2013 Final Rule, the 

Bureau implemented this requirement 

in § 1026.43(e)(3), adopting higher 

points-and-fees thresholds for different 

tiers of loan amounts less than or equal 

to $100,000, adjusted for inflation.306

The Bureau’s conclusion that creditors 

originating smaller loans typically 

impose higher points and fees or higher 

interest rates to recover their costs, 

regardless of the consumer’s 

creditworthiness, and that higher 

thresholds for smaller loans in 

§ 1026.43(e)(2)(vi) are therefore 

warranted, is generally consistent with 

the statutory directive to adopt higher 

points-and-fees thresholds for smaller 

loans. 

To develop the thresholds for smaller 

loans in § 1026.43(e)(2)(vi)(B) and (C), 

the Bureau analyzed evidence related to 

credit characteristics and loan 

performance for first-lien purchase 

transactions at various rate spreads and 

loan amounts (adjusted for inflation) 

using HMDA and NMDB data, as shown 

in Table 9.307 To ensure a sufficient 


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86368 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

(CPI–U), (Apr. 2020), https://www.bls.gov/cpi/ 

tables/supplemental-files/historical-cpi-u202004.pdf. (Using the CPI–U price index, nominal 

loan amounts are inflated to June 2020 dollars from 

the price level in June of the year prior to 

origination. This effectively categorizes loans 

according to the inflation-adjusted thresholds for 

smaller loans that would have been in effect on the 

origination date. The set of loans categorized within 

a given threshold remains the same as in the 

proposal, in which nominal loan amounts were 

inflated to June 2019 dollars and compared against 

the corresponding threshold levels of $65,939 and 

$109,898.) 

308Portfolio loans made by small creditors, as 

defined in § 1026.35(b)(2)(iii)(B) and (C), are 

excluded, as such loans are likely Small Creditor 

QMs pursuant to § 1026.43(e)(5) regardless of 

pricing. 

sample size was available for a reliable 

analysis, the Bureau used cumulative 

rate-spread ranges. 

analysis, the Bureau used cumulative 

rate-spread ranges. 

TABLE 9—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF FIRST-LIEN TRANSACTIONS AT VARIOUS

RATE SPREADS

Loan size group 

Rate spread range 

(percentage points over 

APOR) 

Mean CLTV, 

2018 HMDA 

Mean DTI, 

2018 HMDA 

Mean credit 

score, 

2018 HMDA 

Percent 

observed 

60+ days 

delinquent 

within first 

2 years, 

2002–2008 

NMDB 

(%) 

Percent 

observed 

60+ days 

delinquent 

within first 

2 years, 

2018 NMDB 

(%) 

Under $66,156 .................... 1.5–2.0 ............................... 81.9 32.3 717 6.1 2.8 

Under $66,156 .................... 1.5–2.5 ............................... 82.2 32.3 714 6.1 2.3 

Under $66,156 .................... 1.5–3.0 ............................... 82.1 32.2 714 6.2 2.3 

Under $66,156 .................... 1.5–3.5 ............................... 81.9 32.1 715 6.2 2.5 

Under $66,156 .................... 1.5–4.0 ............................... 81.7 32.3 714 6.3 2.5 

Under $66,156 .................... 1.5–4.5 ............................... 81.7 32.5 710 6.4 2.6 

Under $66,156 .................... 1.5–5.0 ............................... 81.7 32.6 706 6.4 2.5 

Under $66,156 .................... 1.5–5.5 ............................... 81.6 32.7 699 6.5 2.4 

Under $66,156 .................... 1.5–6.0 ............................... 81.7 32.9 694 6.5 2.5 

Under $66,156 .................... 1.5–6.5 ............................... 81.9 33.1 685 6.5 3.4 

Under $66,156 .................... 1.5 and above .................... 82.0 33.3 676 6.6 4.1 

$66,156 to $110,259 ........... 1.5–2.0 ............................... 89.9 35.5 704 11.1 3.4 

$66,156 to $110,259 ........... 1.5–2.5 ............................... 90.1 35.4 702 12.2 4.2 

$66,156 to $110,259 ........... 1.5–3.0 ............................... 90.0 35.5 702 12.9 4.2 

$66,156 to $110,259 ........... 1.5–3.5 ............................... 89.7 35.5 703 13.0 4.3 

$66,156 to $110,259 ........... 1.5–4.0 ............................... 89.4 35.6 703 13.1 4.0 

$66,156 to $110,259 ........... 1.5–4.5 ............................... 89.3 35.7 701 13.2 4.2 

$66,156 to $110,259 ........... 1.5–5.0 ............................... 89.1 35.8 699 13.3 4.1 

$66,156 to $110,259 ........... 1.5–5.5 ............................... 89.1 35.9 696 13.4 4.0 

$66,156 to $110,259 ........... 1.5–6.0 ............................... 89.2 36.0 692 13.4 4.2 

$66,156 to $110,259 ........... 1.5–6.5 ............................... 89.3 36.1 684 13.4 4.5 

$66,156 to $110,259 ........... 1.5 and above .................... 89.3 36.1 684 13.7 4.5 

$110,260 and above, manufactured and site-built 

housing.

1.5–2.25 (for comparison) .. 92.4 39.3 698 15.6 2.7 

The Bureau’s analysis indicates that 

consumers with smaller loans with 

APRs within higher thresholds, such as 

6.5 or 3.5 percentage points above 

APOR, have similar credit 

characteristics as consumers with larger 

loans with APRs between 1.5 and 2.25 

percentage points above APOR.308

More specifically, the Bureau 

analyzed 2018 HMDA data on first-lien 

conventional purchase loans and found 

that loans less than $66,156 that are 

priced between 1.5 and 6.5 percentage 

points above APOR have a mean DTI 

ratio of 33.1 percent, a mean combined 

LTV ratio of 81.9 percent, and a mean 

credit score of 685. Loans greater than 

or equal to $66,156 but less than 

$110,260 that are priced between 1.5 

and 3.5 percentage points above APOR 

have a mean DTI ratio of 35.5 percent, 

a mean combined LTV of 89.7 percent, 

and a mean credit score of 703. Loans 

greater than or equal to $110,260 that 

are priced between 1.5 and 2.25 

percentage points above APOR have a 

mean DTI ratio of 39.3 percent, a mean 

combined LTV of 92.4 percent, and a 

mean credit score of 698. These data 

comparisons all suggest that the credit 

characteristics, and potentially the 

ability to repay, of consumers taking out 

smaller loans with higher APRs, may be 

at least comparable to those of 

consumers taking out larger loans with 

lower APRs. 

With respect to early delinquencies, 

the evidence summarized in Table 9 

generally provides support for higher 

thresholds for smaller loans. Loans less 

than $66,156 had lower delinquency 

rates than loans greater than or equal to 

$66,156 but less than $110,260 across 

all rate spread ranges and generally had 

delinquency rates lower than larger 

loans (greater than or equal to $110,260) 

priced between 1.5 and 2.25 percentage 

points above APOR, except as described 

below. Loans greater than or equal to 

$66,156 but less than $110,260 had 

lower delinquency rates than larger 

loans between 2002 and 2008, but 

higher delinquency rates in 2018. 

More specifically, the Bureau 

analyzed NMDB data from 2002 through 

2008 on first-lien conventional purchase 

loans and found that loans less than 

$66,156 that were priced between 1.5 

and 6.5 percentage points above APOR 

had an early delinquency rate of 6.5 

percent. Loans greater than or equal to 

$66,156 but less than $110,260 that 

were priced between 1.5 and 3.5 

percentage points above APOR had an 

early delinquency rate of 13 percent. 

Loans greater than or equal to $110,260 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86369 

309 85 FR 41716, 41732 n.190 (July 10, 2020). The 

Bureau also grouped loans with rate spreads of 2 

percentage points or more to ensure a sufficient 

sample size for a reliable analysis of 2018 data in 

Tables 2 and 6 of the General QM Proposal. Id. at 

41732 n.193. 

310The Bureau grouped loans in General QM 

Proposal Table 10 for the same reasons. This 

grouping ensured a sufficient sample size for a 

reliable analysis of Y–14M data for subordinate-lien 

transactions. 

that were priced between 1.5 and 2.25 

percentage points above APOR had an 

early delinquency rate of 15.6 percent. 

These rates suggest that the historical 

loan performance of smaller loans with 

higher APRs may be comparable, if not 

better, than larger loans with lower 

APRs. 

However, the Bureau’s analysis found 

that early delinquency rates for 2018 

loans are somewhat higher for smaller 

loans with higher APRs than larger 

loans with lower APRs. More 

specifically, NMDB data from 2018 on 

first-lien conventional purchase loans 

indicates that loans less than $66,156 

that were priced between 1.5 and 6.5 

percentage points above APOR had an 

early delinquency rate of 3.4 percent 

and those that were priced 1.5 

percentage points over APOR and above 

had an early delinquency rate of 4.1 

percent. Loans greater than or equal to 

$66,156 but less than $110,260 that 

were priced between 1.5 and 3.5 

percentage points above APOR had an 

early delinquency rate of 4.3 percent. 

Loans greater than or equal to $110,260 

that were priced between 1.5 and 2.25 

percentage points above APOR had an 

early delinquency rate of 2.7 percent. 

Although the data in the rulemaking 

record do not appear to indicate a 

particular threshold at which the credit 

characteristics or loan performance for 

smaller loans with higher APRs decline 

significantly, the Bureau concludes that 

the thresholds in § 1026.43(e)(2)(vi)(B) 

and (C) for smaller, first-lien covered 

transactions strike the best balance 

between ensuring consumers’ ability to 

repay and ensuring access to 

responsible, affordable mortgage credit. 

As described in more detail above, 

consumer advocate commenters 

recommended that the Bureau further 

refine the data before concluding that 

smaller loans with APRs within higher 

thresholds have similar credit 

characteristics and comparable levels of 

early delinquencies as larger loans. The 

commenters based their 

recommendation on specific concerns, 

including: (1) The absence of loan 

volume data and the use of cumulative 

rate-spread ranges, instead of 

incremental rate-spread ranges, in 

General QM Proposal Table 9; and (2) 

the absence of an analysis of chattel 

loans, separate from that of real-estate 

secured mortgages. The Bureau 

understands these concerns to suggest 

three issues: (1) That without loan 

volume data, it was not clear if there 

was a sufficient sample size for a 

reliable analysis; (2) that cumulative 

rate-spread ranges resulted in a skewed 

analysis of the early delinquency rates 

for smaller loans at or near the 

threshold; and (3) that differences 

between chattel loans and real-estate 

secured mortgages, with respect to 

pricing and performance, were not 

adequately considered. 

However, the Bureau took all these 

issues into account when using HMDA 

and NMDB data to analyze the evidence 

related to the credit characteristics and 

loan performance of first-lien purchase 

transactions at various rate spread and 

loan amounts. As explained in the 

General QM Proposal, the Bureau 

grouped loans at higher rate spreads 

when a sufficient number of 

observations did not exist in the data for 

a reliable analysis. For example, the 

Bureau grouped loans with rate spreads 

of 2.25 percentage points or more to 

ensure a sufficient sample size for a 

reliable analysis of the 2002–2008 data 

in Tables 1 and 5 of the General QM 

Proposal.309 This grouping ensured that 

all cells shown in these tables contained 

at least 500 loans. For similar reasons, 

the Bureau grouped loans in General 

QM Proposal Table 9 (and Table 9 

above).310 The Bureau determined that 

it was necessary to use a cumulative 

rate-spread range to ensure a sufficient 

sample size for a reliable analysis of 

2018 NMDB data for higher-priced, 

smaller loans. More specifically, by 

grouping first-lien loans less than 

$65,939 ($66,156, when adjusted for 

inflation), priced between 1.5 and 6.5 

percentage points above APOR, the 

Bureau was able to analyze the 

performance of 677 loans from 2018 

NMDB data compared to only 87 loans 

if the Bureau looked at first-lien loans 

less than $65,939 that were priced 

between 6 and 6.5 percentage points 

above APOR. 

Moreover, an analysis using 

incremental rate-spread ranges would 

have also supported higher thresholds 

for smaller loans. When using only 

2002–2008 NMDB data, because of 

limitations in 2018 NMDB data, loans 

less than $66,156 and loans greater than 

or equal to $66,156 but less than 

$110,260 that were priced at or a half 

percentage point below the threshold 

had lower delinquency rates than larger 

loans (greater than or equal to $110,260) 

priced between 1.5 and 2.25 percentage 

points above APOR. 

Specifically, loans less than $66,156 

that were priced between 6 and 6.5 

percentage points above APOR had an 

early delinquency rate of 7.7 percent. 

Loans greater than or equal to $66,156 

but less than $110,260 that were priced 

between 3 and 3.5 percentage points 

above APOR had an early delinquency 

rate of 13.9 percent. Loans greater than 

or equal to $110,260 that were priced 

between 1.5 and 2.25 percentage points 

above APOR had an early delinquency 

rate of 15.6 percent. These early 

delinquency rates suggest that even 

under an approach using incremental 

rate-spread ranges, the historical 

performance of smaller loans with 

higher APRs remained comparable, if 

not better, than larger loans with lower 

APRs. 

Some commenters recommended 

analyzing chattel loans separately from 

real-estate secured mortgages because of 

potential differences between the two 

with respect to pricing and 

performance. Consumer advocate 

commenters cited a newspaper article 

suggesting that chattel loans may not 

perform well. However, the Bureau is 

not aware of any data that sufficiently 

address how pricing at various 

thresholds correlates with performance 

or demonstrate how pricing varies with 

the performance of chattel loans relative 

to real-estate secured mortgages. 

Further, the Bureau’s own data are not 

sufficient to separately analyze chattel 

loans from real-estate secured mortgages 

at various pricing thresholds. The 

Bureau’s merged historical HMDA and 

NMDB data do not have reliable 

indicators for chattel loans. And 

although 2018 HMDA and NMDB data 

do have more reliable indicators, there 

are too few loans in 2018 data to reliably 

distinguish performance across different 

rate spread or loan size groupings. 

Accordingly, the Bureau lacks a 

reasoned basis for setting a different 

pricing threshold for chattel loans 

relative to real-estate secured mortgages, 

particularly given the access-to-credit 

concerns and other concerns described 

below. The Bureau will, however, 

continue to monitor the market and, if 

additional data become available and 

indicate that an adjustment to the 

thresholds for smaller loans and smaller 

manufactured housing loans is 

warranted, the Bureau will consider 

making an adjustment. 

Lastly, as described above, some 

consumer advocate commenters 

suggested that land installment 

contracts would be newly eligible for 

General QM status under this final rule. 

The commenters, however, did not 

provide the Bureau with evidence or 

data indicating that land installment 


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86370 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

311All estimates in Table 10 includes loans that 

meet the Small Creditor QM loan definition in 

§ 1026.43(e)(5). 

312The Bureau notes that one consequence of this 

6.5 percent threshold and the other pricing 

thresholds in the final rule, like the pricing 

thresholds in the proposal, is that high-cost 

mortgages under HOEPA cannot qualify for General 

QM status. See 12 CFR 1026.32(a), 1026.34(a)(4), 

1026.43(e)(3), (g)(1). Thus, for the reasons discussed 

in this final rule for adopting these pricing 

thresholds, the Bureau is no longer exercising 

authority under HOEPA to permit certain lower-DTI 

high-cost mortgages to qualify as General QMs. Cf. 

78 FR 6855, 6861–62, 6924–25 (Jan. 31, 2013). 

contracts that were previously ineligible 

for General QM status would become 

eligible for General QM status under the 

amended General QM loan definition in 

this final rule. As described above, the 

Bureau anticipates the price-based 

approach in this final rule will change 

the share of covered transactions that 

would be eligible for General QM status. 

Specifically, loans with DTI ratios over 

43 percent priced under the thresholds 

will be eligible for General QM status, 

and loans with DTI ratios under 43 

percent but priced over the thresholds 

will not be eligible for General QM 

status. However, the Bureau does not 

have data or other evidence indicating 

that the final rule will change the scope 

of transactions covered by the Rule so 

that certain land installment contracts 

will now be eligible for General QM 

status. 

Smaller manufactured housing loans. 

As discussed above, commenters 

asserted that a substantial share of 

manufactured housing loans that qualify 

as General QMs under the current 

definition would fail to qualify under 

the proposed pricing thresholds. These 

commenters confirmed the Bureau’s 

concerns, as discussed in the General 

QM Proposal, regarding the impact a 

price-based General QM definition, 

without higher thresholds, would have 

on the availability of responsible, 

affordable mortgage credit for 

manufactured homes. Specifically, the 

commenters confirmed the Bureau’s 

concern that manufactured housing 

loans with smaller loan amounts are 

typically priced higher than loans with 

larger loan amounts, even though a 

consumer with a smaller manufactured 

housing loan may have similar ability to 

repay; and that while some smaller 

manufactured housing loans may be 

originated under other QM definitions 

or as non-QM loans, those loans may 

cost materially more to consumers, and 

some may not be originated at all. The 

Bureau also analyzed 2018 HMDA data 

to confirm its concerns on the potential 

effects on access to credit of a pricebased approach to defining a General 

QM. The Bureau’s analysis found that 

55 percent of manufactured housing 

loans are priced 2.25 percentage points 

or more above APOR. Moreover, as 

indicated by the various combinations 

in Table 10 below,311 the Bureau 

estimates, based on 2018 HMDA data, 

that under the current rule—including 

the Temporary GSE QM loan definition, 

the General QM loan definition with a 

43 percent DTI limit, and the Small 

Creditor QM loan definition in 

§ 1026.43(e)(5)—83.6 percent of firstlien covered transactions secured by a 

manufactured home were General QMs. 

However, under the proposed General 

QM thresholds for larger loans and 

smaller loans, the Bureau estimates that 

72.3 percent of first-lien covered 

transactions secured by a manufactured 

home would have been General QMs. 

TABLE 10—SHARE OF 2018 MANUFACTURED HOUSING CONVENTIONAL FIRST-LIEN PURCHASE TRANSACTIONS WITHIN

VARIOUS QM DEFINITIONS

[HMDA data] 

Approach 

QM 

(share of 

manufactured 

housing loans) 

Temporary GSE QM + DTI 43 ...................................................................................................................................................... 83.6 

Proposal ......................................................................................................................................................................................... 72.3 

Final rule with small, manufactured housing loan pricing at 6.5 ................................................................................................... 84.6 

In view of commenter confirmation of 

the Bureau’s concerns regarding the 

potential effects of the proposal on the 

availability of responsible, affordable 

mortgage credit for manufactured 

homes, the Bureau has reconsidered 

whether the proposed thresholds for 

smaller loans strike the best balance 

between ensuring consumers’ 

repayment ability and maintaining 

access to responsible, affordable 

mortgage credit for manufactured 

homes. Specifically, the Bureau 

concludes that it achieves a better 

balance of these competing 

considerations by expanding the 

proposed rebuttable presumption of 

compliance with the ATR requirements 

to loans for manufactured housing less 

than $110,260 that are higher-priced 

loans under § 1026.43(b)(4) but are 

priced below the threshold in 

§ 1026.43(e)(2)(vi)(D). In so concluding, 

the Bureau acknowledges that Table 9 

suggests a higher risk of early 

delinquency among first-lien covered 

transactions secured by a manufactured 

home priced equal to or greater than 

$66,156. But the Bureau concludes that 

the degree of risk is acceptable in view 

of a potentially significant reduction of 

access to such mortgage credit and the 

fact that consumers obtaining such 

loans will retain the opportunity to 

rebut the presumption of compliance by 

showing that the creditor in fact lacked 

a good faith and reasonable belief in the 

consumer’s reasonable ability to repay 

the loan. 

Section 1026.43(e)(2)(vi)(D) as 

finalized thus provides that, for firstlien covered transactions secured by a 

manufactured home with a loan amount 

less than $110,260 (indexed for 

inflation), the APR may not exceed 

APOR for a comparable transaction as of 

the date the interest rate is set by 6.5 or 

more percentage points. Smaller loans 

secured by a manufactured home and 

priced at or above the 6.5-percentagepoint threshold are not eligible for QM 

status under § 1026.43(e)(2).312 Under 

the final rule with this threshold, the 

Bureau estimates that, based on 2018 

HMDA data, 84.6 percent of first-lien 

covered transactions secured by a 

manufactured home would have been 

General QMs. This is consistent with 

the share of first-lien covered 

transactions secured by a manufactured 

home that were QMs under the current 

rule, which includes the Temporary 

GSE QM loan definition, the General 

QM loan definition with a 43 percent 

DTI limit, and the Small Creditor QM 

loan definition in § 1026.43(e)(5). 

The access-to-credit concerns 

described above are sufficient by 

themselves to support the Bureau’s 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86371 

decision to adopt a higher pricing 

threshold for smaller manufactured 

housing loans. This threshold also is 

independently supported by the credit 

characteristics of consumers with these 

loans. Specifically, the Bureau 

considered 2018 HMDA data to assess 

whether consumers who take out 

smaller manufactured housing loans 

with higher APRs have similar credit 

characteristics, and thus similar ability 

to repay, as consumers who take out 

larger loans with lower APRs. The 

Bureau would have also considered 

whether the consumer was ever 60 or 

more days past due within the first 2 

years after origination, i.e., the early 

delinquency rate. However, as described 

above, the Bureau does not have 

sufficient loan performance data on 

manufactured housing loans for a 

reliable analysis of whether consumers 

who take out these smaller 

manufactured housing loans had early 

difficulties in making payments. 

Accordingly, the Bureau limited its 

ability-to-repay analysis to the credit 

characteristics of consumers taking out 

smaller manufactured housing loans 

with APRs within higher thresholds, as 

shown in Table 11. 

TABLE 11—LOAN CHARACTERISTICS FOR DIFFERENT SIZES OF MANUFACTURED HOUSING FIRST-LIEN TRANSACTIONS AT

VARIOUS RATE SPREADS

Loan size group Rate spread range 

(percentage points over APOR) 

Mean CLTV, 

2018 HMDA 

Mean DTI, 

2018 HMDA 

Mean credit 

score, 

2018 HMDA 

Under $66,156 ................................................ 1.5–2.0 ........................................................... 74.2 31.8 733 

Under $66,156 ................................................ 1.5–2.5 ........................................................... 73.7 31.2 735 

Under $66,156 ................................................ 1.5–3.0 ........................................................... 74.6 31.5 737 

Under $66,156 ................................................ 1.5–3.5 ........................................................... 75.6 31.6 734 

Under $66,156 ................................................ 1.5–4.0 ........................................................... 76.3 32.1 728 

Under $66,156 ................................................ 1.5–4.5 ........................................................... 77.4 32.7 717 

Under $66,156 ................................................ 1.5–5.0 ........................................................... 77.8 32.8 709 

Under $66,156 ................................................ 1.5–5.5 ........................................................... 78.1 33.0 697 

Under $66,156 ................................................ 1.5–6.0 ........................................................... 78.6 33.2 689 

Under $66,156 ................................................ 1.5–6.5 ........................................................... 79.4 33.6 676 

Under $66,156 ................................................ 1.5 and above ................................................ 80.1 33.6 665 

$66,156 to $110,259 ....................................... 1.5–2.0 ........................................................... 85.4 23.3 732 

$66,156 to $110,259 ....................................... 1.5–2.5 ........................................................... 85.2 34.2 735 

$66,156 to $110,259 ....................................... 1.5–3.0 ........................................................... 85.5 34.6 731 

$66,156 to $110,259 ....................................... 1.5–3.5 ........................................................... 85.8 35.0 728 

$66,156 to $110,259 ....................................... 1.5–4.0 ........................................................... 85.9 35.5 723 

$66,156 to $110,259 ....................................... 1.5–4.5 ........................................................... 86.1 35.9 715 

$66,156 to $110,259 ....................................... 1.5–5.0 ........................................................... 86.5 36.1 707 

$66,156 to $110,259 ....................................... 1.5–5.5 ........................................................... 86.8 36.3 699 

$66,156 to $110,259 ....................................... 1.5–6.0 ........................................................... 87.6 36.5 690 

$66,156 to $110,259 ....................................... 1.5–6.5 ........................................................... 88.2 36.6 677 

$66,156 to $110,259 ....................................... 1.5 and above ................................................ 88.2 36.7 676 

$110,260 and above, manufactured and sitebuilt housing.1.5–2.25 (for comparison) .............................. 92.4 39.3 698 

The Bureau’s analysis indicates that 

consumers with smaller manufactured 

housing loans with APRs up to 6.5 

percentage points above APOR have 

credit characteristics that are 

comparable to, if not better than, 

consumers with larger loans priced 

between 1.5 and 2.25 percentage points 

above APOR. More specifically, the 

Bureau found that smaller manufactured 

housing loans less than $66,156 that are 

priced between 1.5 and 6.5 percentage 

points above APOR have a mean DTI 

ratio of 33.6 percent, a mean combined 

LTV ratio of 79.4 percent, and a mean 

credit score of 676. Smaller 

manufactured housing loans greater 

than or equal to $66,156 but less than 

$110,260 that are priced between 1.5 

and 6.5 percentage points above APOR 

have a mean DTI ratio of 36.6 percent, 

a mean combined LTV ratio of 88.2 

percent, and a mean credit score of 677. 

Loans greater than or equal to $110,260 

that are priced between 1.5 and 2.25 

percentage points above APOR have a 

mean DTI ratio of 39.3 percent, a mean 

combined LTV ratio of 92.4 percent, and 

a mean credit score of 698. These all 

suggest that the credit characteristics of 

consumers taking out smaller 

manufactured housing loans with higher 

APRs appear to be at least comparable 

to, if not better than, those of consumers 

taking out larger loans with lower APRs. 

This suggests that consumers taking out 

smaller manufactured housing loans 

with higher APRs may have an ability 

to repay these loans at least comparable 

to the consumers who take out larger 

loans with lower APRs. 

Although the current data appear to 

indicate some thresholds at which 

certain credit characteristics, in 

particular credit score, decline for 

smaller manufactured housing loans 

with higher APRs, the Bureau concludes 

that the adopted threshold in 

§ 1026.43(e)(2)(vi)(D) for smaller, firstlien covered transactions secured by a 

manufactured home strikes the best 

balance between ensuring consumers’ 

ability to repay and ensuring access to 

responsible, affordable mortgage credit 

for manufactured homes. 

The Bureau is also adding two 

comments to provide additional 

clarification on the pricing threshold for 

smaller loans secured by a 

manufactured home. Comment 

43(e)(2)(vi)–5 clarifies that the term 

‘‘manufactured home,’’ as used in 

§ 1026.43(e)(2)(vi)(D), means any 

residential structure as defined under 

HUD regulations establishing 

manufactured home construction and 

safety standards (24 CFR 3280.2). 

Modular or other factory-built homes 

that do not meet the HUD code 

standards are not manufactured homes 

for purposes of § 1026.43(e)(2)(vi)(D). 

Comment 43(e)(2)(vi)–6 provides that 

the threshold in § 1026.43(e)(2)(vi)(D) 

applies to first-lien covered transactions 

less than $110,260 (indexed for 

inflation) that are secured by a 

manufactured home and land, or by a 

manufactured home only. 


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313Bureau of Consumer Fin. Prot., Introducing 

New and Revised Data Points in HMDA, at 207 

(Aug. 2019), https://files.consumerfinance.gov/f/ 

documents/cfpb_new-revised-data-points-in-hmda_

report.pdf. 

314 Id. 

315For example, chattel loans are not subject to 

the TILA–RESPA Integrated Disclosure Rule. See 12 

CFR 1026.19(e) and (f). 316 78 FR 6408, 6506 (Jan. 30, 2013). 

The Bureau is aware that whether a 

manufactured home is titled as personal 

property or as real property factors into 

the cost of the loan and that the price 

may be relatively higher for a loan in 

which the manufactured home is titled 

as personal property (i.e., a chattel 

loan).313 However, the Bureau is not 

adopting a higher threshold for only 

smaller chattel loans. Doing so would 

incentivize manufactured home 

creditors to encourage consumers to title 

their manufactured homes as personal 

property to originate a QM-eligible loan. 

Generally, titling manufactured homes 

as personal property may have 

disadvantages for consumers because 

chattel loans tend to be more 

expensive,314 and have fewer consumer 

protections.315 Moreover, as explained 

above, the Bureau does not have 

sufficient performance data to analyze 

how chattel loans perform relative to 

real estate-secured mortgages at various 

pricing thresholds. Without this data 

and given the risks for consumers’ 

titling their manufactured homes as 

personal property, the Bureau has 

decided to adopt a higher pricing 

threshold for smaller loans secured by 

either a manufactured home and land, 

or by a manufactured home only. 

Moreover, the Bureau understands 

that creditors may either increase or 

decrease the price of these loans to just 

below the adopted threshold. To the 

extent creditors reduce the price of the 

loan, this would result in more 

affordable prices; for example, some 

consumers whose loans would have 

otherwise been priced above the 

threshold may now be eligible for loans 

below the threshold. These loans would 

also be subject to the QM prohibitions 

on certain loan features and limits on 

points and fees, which would provide 

protections for consumers. However, 

this development could also lead to an 

increase in the number of consumers 

with delinquent loans who would have 

to rebut the creditor’s presumption of 

compliance to benefit from an ability-torepay cause of action or defense against 

foreclosure. Regardless, the Bureau does 

not have sufficient data to determine 

whether these developments would 

occur and the impact these 

developments would have on the 

benefits and costs to consumers. 

However, as described above, the 

Bureau intends to monitor the market 

for additional data that might indicate 

the need for the Bureau to consider a 

future adjustment. 

A few commenters recommended 

alternatives other than the one adopted 

here to address the access-to-credit 

concern for manufactured homes. 

However, the Bureau concludes that 

adopting a higher pricing threshold for 

smaller loans secured by a 

manufactured home addresses the 

access-to-credit concerns better than the 

recommended alternatives. The first 

recommendation to increase the dollar 

thresholds defining ‘‘smaller loans,’’ 

would result in a definition that is 

inconsistent with the meaning of 

‘‘smaller loans’’ in the small loan 

exception to the QM points and fees 

cap, which could potentially lead to 

certain compliance challenges. The 

other recommendation to incorporate 

HOEPA’s APR thresholds into the 

General QM loan definition does not 

properly acknowledge HOEPA’s 

statutory objective, which was to 

identify transactions requiring creditors 

to provide additional disclosures and 

prohibiting creditors from engaging in 

certain practices. The Bureau does not 

believe that it should implement 

thresholds designed for those discrete 

uses here, in determining whether the 

transaction should be eligible for a 

rebuttable presumption of compliance 

with the ATR requirements. Lastly, the 

Bureau declines to adopt a 

complementary DTI alternative for 

manufactured housing loans. A 

complementary DTI alternative would 

be unduly complex and not necessary 

given that the Bureau expects the final 

pricing threshold to improve access to 

credit for manufactured homes. 

Moreover, the Bureau believes that a 

loan’s price, as measured by comparing 

a loan’s APR to APOR for a comparable 

transaction, is a strong indicator of a 

consumer’s ability to repay and is a 

more holistic and flexible measure of a 

consumer’s ability to repay than DTI 

alone. For these reasons, the Bureau 

concludes that adopting a higher pricing 

threshold for smaller loans secured by a 

manufactured home strikes a better 

balance between ensuring consumers’ 

ability to repay and ensuring access to 

responsible, affordable mortgage credit 

for manufactured homes. 

Subordinate-lien transactions. The 

Bureau is adopting higher thresholds in 

§ 1026.43(e)(2)(vi)(E) and (F) for 

subordinate-lien transactions because 

subordinate-lien transactions may be 

priced higher than comparable first-lien 

transactions for reasons other than 

consumers’ ability to repay. In general, 

the creditor of a subordinate lien will 

recover its principal, in the event of 

default and foreclosure, only to the 

extent funds remain after the first-lien 

creditor recovers its principal. Thus, to 

compensate for this risk, creditors 

typically price subordinate-lien 

transactions higher than first-lien 

transactions, even though the consumer 

in the subordinate-lien transaction may 

have similar credit characteristics and 

ability to repay. In addition, 

subordinate-lien transactions are often 

for smaller loan amounts, so the pricing 

factors discussed above for smaller loan 

amounts may further increase the price 

of subordinate-lien transactions, 

regardless of the consumer’s ability to 

repay. To the extent the higher pricing 

for a subordinate-lien transaction is not 

related to consumers’ ability to repay, 

applying the same pricing to them as 

first-lien transactions results in them 

being excluded from QM status under 

§ 1026.43(e)(2). 

In the January 2013 Final Rule, the 

Bureau adopted higher thresholds for 

determining if subordinate-lien QMs 

received a rebuttable presumption or a 

conclusive presumption of compliance 

with the ATR requirements.316 For 

subordinate-lien transactions, the 

definition of ‘‘higher-priced covered 

transaction’’ in § 1026.43(b)(4) is used in 

§ 1026.43(e)(1) to set a threshold of 3.5 

percentage points above APOR to 

determine which subordinate-lien QMs 

receive a safe harbor and which receive 

a rebuttable presumption of compliance. 

As discussed above in part V, the 

Bureau is not proposing to alter the 

threshold for subordinate-lien 

transactions in § 1026.43(b)(4). To avoid 

the odd result that a subordinate-lien 

transaction would otherwise be eligible 

to receive a safe harbor under 

§ 1026.43(b)(4) and (e)(1) but would not 

be eligible for QM status under 

§ 1026.43(e)(2)(vi), the Bureau 

considered which threshold or 

thresholds at or above 3.5 percentage 

points above APOR to propose for 

subordinate-lien transactions in 

§ 1026.43(e)(2)(vi). 


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317See Bureau of Labor and Statistics, Historical 

Consumer Price Index for All Urban Consumers 

(CPI–U), (Apr. 2020), https://www.bls.gov/cpi/ 

tables/supplemental-files/historical-cpi-u202004.pdf. (Using the CPI–U price index, nominal 

loan amounts are inflated to June 2020 dollars from 

the price level in June of the year prior to 

origination. This effectively categorizes loans 

according to the inflation-adjusted thresholds for 

smaller loans that would have been in effect on the 

origination date. The set of loans categorized within 

a given threshold remains the same as in the 

proposal, in which nominal loan amounts were 

inflated to June 2019 dollars and compared against 

the corresponding threshold levels of $65,939 and 

$109,898.) 318As with its analysis of higher-priced, smaller 

loans above, the Bureau determined that it was 

necessary to use cumulative rate-spread ranges to 

ensure sufficient sample sizes for a reliable analysis 

of Y–14M data for subordinate lien loans. Without 

this cumulative grouping, the sample sizes for some 

rate-spread ranges would be insufficient for reliable 

analysis. 319The loan data were a subset of the supervisory 

loan-level data collected as part of the Federal 

Reserve’s Comprehensive Capital Analysis and 

Review, known as Y–14M data. The early 

delinquency rate measured the percentage of loans 

that were 90 or more days late in the first two years. 

The Bureau used loans with payments that were 90 

or more days late to measure delinquency, rather 

than the 60 or more days used with the data 

discussed above for first-lien transactions, because 

the Y–14M data do not include a measure for 

payments 60 or more days late. Data from a small 

number of lenders were not included due to 

incompatible formatting. 

To develop the thresholds for 

subordinate-lien transactions in 

§ 1026.43(e)(2)(vi)(E) and (F), the Bureau 

considered evidence related to credit 

characteristics and loan performance for 

subordinate-lien transactions at various 

rate spreads and loan amounts (adjusted 

for inflation) using HMDA and Y–14M 

data, as shown in Table 12.317 To ensure 

a sufficient sample size was available 

for a reliable analysis, the Bureau used 

cumulative rate-spread ranges.318

TABLE 12—LOAN CHARACTERISTICS AND PERFORMANCE FOR DIFFERENT SIZES OF SUBORDINATE-LIEN TRANSACTIONS AT

VARIOUS RATE SPREADS

Loan size group Rate spread range 

(percentage points over APOR) 

Mean CLTV, 

2018 HMDA 

Mean DTI, 

2018 HMDA 

Mean credit 

score, 

2018 HMDA 

Percent 

observed 

90+ days 

delinquent 

within first 

2 years, 

2013–2016 

Y–14M data 

(subset) 

(%) 

Under $66,156 .................................. 2.0–2.5 ............................................. 76.9 36.1 728 2.1 

Under $66,156 .................................. 2.0–3.0 ............................................. 78.4 36.5 724 1.6 

Under $66,156 .................................. 2.0–3.5 ............................................. 79.7 36.8 721 1.4 

Under $66,156 .................................. 2.0–4.0 ............................................. 80.1 36.9 720 1.4 

Under $66,156 .................................. 2.0–4.5 ............................................. 80.2 36.9 719 1.3 

Under $66,156 .................................. 2.0–5.0 ............................................. 80.3 37.0 718 1.3 

Under $66,156 .................................. 2.0–5.5 ............................................. 80.3 37.1 718 1.3 

Under $66,156 .................................. 2.0–6.0 ............................................. 80.3 37.1 717 1.3 

Under $66,156 .................................. 2.0–6.5 ............................................. 80.4 37.2 717 1.3 

Under $66,156 .................................. 2.0 and above .................................. 80.7 37.3 715 1.4 

$66,156 and above ........................... 2.0–2.5 ............................................. 79.5 37.2 738 1.9 

$66,156 and above ........................... 2.0–3.0 ............................................. 80.5 37.3 735 1.7 

$66,156 and above ........................... 2.0–3.5 ............................................. 81.0 37.4 732 1.6 

$66,156 and above ........................... 2.0–4.0 ............................................. 81.3 37.5 732 1.7 

$66,156 and above ........................... 2.0–4.5 ............................................. 81.3 37.6 731 1.7 

$66,156 and above ........................... 2.0–5.0 ............................................. 81.5 37.7 731 1.8 

$66,156 and above ........................... 2.0–5.5 ............................................. 81.6 37.7 730 1.8 

$66,156 and above ........................... 2.0–6.0 ............................................. 81.6 37.8 729 1.8 

$66,156 and above ........................... 2.0–6.5 ............................................. 81.7 37.9 729 1.8 

$66,156 and above ........................... 2.0 and above .................................. 81.8 37.9 728 1.9 

In general, the Bureau’s analysis 

found strong credit characteristics and 

loan performance for subordinate-lien 

transactions at various thresholds 

greater than 2 percentage points above 

APOR. The current data do not appear 

to indicate a particular threshold at 

which the credit characteristics or loan 

performance decline significantly. 

With respect to larger subordinatelien transactions, the Bureau’s analysis 

of 2018 HMDA data on subordinate-lien 

conventional loans found that, for 

consumers with subordinate-lien 

transactions greater than or equal to 

$66,156 that were priced up to 2 to 3.5 

percentage points above APOR, the 

mean DTI ratio was 37.4 percent, the 

mean combined LTV was 81 percent, 

and the mean credit score was 732. The 

Bureau also analyzed Y–14M loan data 

for 2013 to 2016 and estimated that 

subordinate-lien transactions greater 

than or equal to $66,156 that were 

priced up to 2 to 3.5 percentage points 

above APOR had an early delinquency 

rate of approximately 1.6 percent.319

These factors appear to provide a strong 

indication of ability to repay, so the 

Bureau has decided to set the threshold 

at 3.5 percentage points above APOR for 

larger subordinate-lien transactions 

(greater than or equal to $66,156) to be 

eligible for QM status under 

§ 1026.43(e)(2). 

The Bureau recognizes that, because 

the price-based approach would leave 

the threshold in § 1026.43(b)(4) for 

higher-priced QMs at 3.5 percentage 

points above APOR for subordinate-lien 

transactions (and that such transactions 

that are not higher priced would, 

therefore, receive a safe harbor under 

§ 1026.43(e)(1)(i)), this approach would 

result in subordinate-lien transactions 

for amounts over $66,156 either being a 

safe harbor QM or not being eligible for 

QM status under § 1026.43(e)(2). No 

such loans would be eligible to be a 

rebuttable presumption QM. 

Nevertheless, the Bureau concludes that 

the threshold best balances the 

relatively strong credit characteristics 

and loan performance of these 

transactions historically, which is 

indicative of ability to repay, against the 

concern that the supporting data are 


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86374 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

320The Bureau also stated that, under proposed 

§ 1026.43(b)(4), an identical special rule for 

determining the APR for certain loans for which the 

interest rate may or will change also applies under 

that paragraph for purposes of determining whether 

a QM under § 1026.43(e)(2) is a higher-priced 

covered transaction and whether it is therefore 

subject to a rebuttable presumption as opposed to 

a conclusive presumption of compliance with the 

with the ATR requirements. 

321A step-rate mortgage is a transaction secured 

by real property or a dwelling 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. See 12 CFR 

1026.18(s)(7)(ii). 

limited to recent years with strong 

economic performance and conservative 

underwriting. 

For smaller subordinate-lien 

transactions, the Bureau’s analysis of 

2018 HMDA data on subordinate-lien 

conventional loans found that for 

consumers with subordinate-lien 

transactions less than $66,156 that were 

priced between 2 and 6.5 percentage 

points above APOR, the mean DTI ratio 

was 37.2 percent, the mean combined 

LTV was 80.4 percent, and the mean 

credit score was 717. The Bureau also 

analyzed Y–14M loan data for 2013 to 

2016 and estimated that subordinatelien transactions less than $66,156 that 

were priced between 2 and 6.5 

percentage points above APOR, the 

early delinquency rate was 

approximately 1.3 percent. Based on 

these relatively strong credit 

characteristics and low delinquency 

rates, the Bureau has decided to set the 

threshold at 6.5 percentage points above 

APOR for subordinate-lien transactions 

less than $66,156 to be eligible for QM 

status under § 1026.43(e)(2). The Bureau 

notes that under this approach, these 

transactions would be eligible only for 

a rebuttable presumption of compliance 

under § 1026.43(e)(1)(ii) when higherpriced under § 1026.43(b)(4), and that 

consumers, therefore, would have the 

opportunity to rebut the presumption 

under § 1026.43(e)(1)(ii)(B). 

Some subordinate-lien transactions 

currently meeting the General QM loan 

definition may fail to do so under the 

adopted thresholds. However, based on 

2018 HMDA data, the Bureau estimates 

that the adopted thresholds will 

increase the overall share of 

subordinate-lien transactions that are 

eligible for QM status. Accordingly, the 

Bureau concludes that its approach 

strikes the best balance between 

ensuring consumers’ ability to repay 

and access to responsible, affordable 

credit for subordinate-lien transactions. 

Determining the APR for Certain Loans 

for Which the Interest Rate May or Will 

Change 

The Bureau’s Proposal 

The Bureau also proposed to revise 

§ 1026.43(e)(2)(vi) to include a special 

rule for determining the APR for certain 

types of loans for purposes of whether 

a loan meets the General QM loan 

definition under § 1026.43(e)(2). This 

proposed special rule would have 

applied to loans for which the interest 

rate may or will change within the first 

five years after the date on which the 

first regular periodic payment will be 

due. For such loans, for purposes of 

determining whether the loan is a 

General QM under § 1026.43(e)(2)(vi), 

the creditor would have been required 

under the proposal to determine the 

APR by treating the maximum interest 

rate that may apply during that five-year 

period as the interest rate for the full 

term of the loan.320 The proposed 

special rule would have applied 

principally to ARMs with initial fixedrate periods of five years or less 

(referred to in the proposal as ‘‘shortreset ARMs’’) but also would have 

applied to step-rate mortgages 321 that 

have an initial period of five years or 

less. The special rule in the proposed 

revisions to § 1026.43(e)(2)(vi) would 

not have modified other provisions in 

Regulation Z for determining the APR 

for other purposes, such as the 

disclosures addressed in or subject to 

the commentary to § 1026.17(c)(1). 

In the proposed rule, the Bureau said 

that it anticipated that the proposed 

price-based approach to defining 

General QMs would in general be 

effective in identifying which loans 

consumers have the ability to repay and 

should therefore be eligible for QM 

status under § 1026.43(e)(2). However, 

the Bureau recognized that, absent the 

special rule, the proposed price-based 

approach may less effectively capture 

specific unaffordability risks of certain 

loans for which the interest rate may or 

will change relatively soon after 

consummation. Therefore, the Bureau 

stated that, for loans for which the 

interest rate may or will change within 

the first five years after the date on 

which the first regular periodic payment 

will be due, a modified approach to 

determining the APR for purposes of the 

rate-spread thresholds under proposed 

§ 1026.43(e)(2) may be warranted. 

Proposed comment 43(e)(2)(vi)–4.i 

stated that provisions in subpart C, 

including the existing commentary to 

§ 1026.17(c)(1), address the 

determination of the APR disclosures 

for closed-end credit transactions and 

that provisions in § 1026.32(a)(3) 

address how to determine the APR to 

determine coverage under 

§ 1026.32(a)(1)(i). It further stated that 

proposed § 1026.43(e)(2)(vi) requires, for 

the purposes of that paragraph, a 

different determination of the APR for a 

QM under proposed § 1026.43(e)(2) for 

which the interest rate may or will 

change within the first five years after 

the date on which the first regular 

periodic payment will be due. In 

addition, proposed comment 

43(e)(2)(vi)–4.i stated that an identical 

special rule for determining the APR for 

such a loan also applies for purposes of 

proposed § 1026.43(b)(4). 

The Bureau proposed comment 

43(e)(2)(vi)–4.ii to explain the 

application of the special rule in 

proposed § 1026.43(e)(2)(vi) for 

determining the APR for a loan for 

which the interest rate may or will 

change within the first five years after 

the date on which the first regular 

periodic payment will be due. 

Specifically, it stated that the special 

rule applies to ARMs that have a fixedrate period of five years or less and to 

step-rate mortgages for which the 

interest rate changes within that fiveyear period. 

Proposed comment 43(e)(2)(vi)–4.iii 

provided that, to determine the APR for 

purposes of proposed 

§ 1026.43(e)(2)(vi), a creditor must treat 

the maximum interest rate that could 

apply at any time during the five-year 

period after the date on which the first 

regular periodic payment will be due as 

the interest rate for the full term of the 

loan, regardless of whether the 

maximum interest rate is reached at the 

first or subsequent adjustment during 

the five-year period. Further, the 

proposed comment cross-referenced 

existing comments 43(e)(2)(iv)–3 and –4 

for additional instruction on how to 

determine the maximum interest rate 

during the first five years after the date 

on which the first regular periodic 

payment will be due. 

The Bureau proposed comment 

43(e)(2)(vi)–4.iv to explain how to use 

the maximum interest rate to determine 

the APR for purposes of proposed 

§ 1026.43(e)(2)(vi). Specifically, the 

proposed comment provided that the 

creditor must determine the APR by 

treating the maximum interest rate 

described in proposed 

§ 1026.43(e)(2)(vi) as the interest rate for 

the full term of the loan. It further 

provided an example of how to 

determine the APR by treating the 

maximum interest rate as the interest 

rate for the full term of the loan. 

The Bureau requested comment on all 

aspects of the proposed special rule in 

proposed § 1026.43(e)(2)(vi). In 

particular, the Bureau requested data 

regarding short-reset ARMs and those 

step-rate mortgages that would be 

subject to the proposed special rule, 


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322For example, many GSE ARM products 

provide for a 2 percentage point cap on the first 

reset. 

including default and delinquency rates 

and the relationship of those rates to 

price. The Bureau also requested 

comment on alternative approaches for 

such loans, including the ones 

discussed in the proposed rule, such as 

imposing specific limits on annual rate 

adjustments for short-reset ARMs, 

applying a different rate spread, and 

excluding such loans from General QM 

eligibility altogether. 

Comments Received 

Of the approximately 75 comments 

the Bureau received in response to its 

General QM Proposal, approximately 25 

comments addressed the ARM special 

rule proposed in § 1026.43(b)(4) and 

(e)(2)(vi). Nearly all of these ARM 

commenters represented industry 

entities—mostly trade associations and 

a few individual companies. Two 

commenters represented a coalition of 

industry and consumer advocates. One 

individual consumer advocate 

submitted a comment. 

Most ARM commenters 

acknowledged that short-reset ARMs 

pose a heightened risk to consumers, 

with many commenters acknowledging 

the risks of payment shock. Some 

commenters agreed that it is appropriate 

for the Bureau to adopt more stringent 

requirements for these loans to obtain 

QM status. Whether or not they 

acknowledged the need for more 

stringent requirements, nearly all 

commenters urged the Bureau to adopt 

some alternative instead of the proposed 

special rule. 

Commenter criticism generally fell 

into two categories: (1) That the special 

rule would be overly burdensome; and 

(2) that, because some ARMs allow up 

to a 2 percentage point increase at the 

first reset,322 the special rule would 

limit or eliminate QM eligibility for 

some or all short-reset ARMs as they are 

currently structured—with some 

commenters predicting that, as a result, 

some or all short-reset ARMs would 

cease to be offered in the marketplace. 

Based on one or both of these criticisms, 

most ARM commenters recommended 

that the Bureau either (1) narrow the 

scope of the special rule to exclude 

some subset of short-reset ARMs from 

its coverage or (2) adopt an alternative 

special rule. One commenter stated that 

ARMs should no longer be eligible for 

the QM safe harbor at all, and should 

instead be designated as rebuttable 

presumption loans if they are eligible 

under the General QM loan definition, 

or non-QM loans if not. 

Several commenters criticized the 

special rule as burdensome. These 

commenters asserted that the new APR 

calculation required under the special 

rule would be ‘‘operationally difficult’’ 

and would require ‘‘significant systems 

adjustment.’’ One commenter 

specifically stated that the APR 

calculation would add compliance risk 

and uncertainty to the mortgage market 

for creditors offering ARM products by 

adding to the ‘‘costs of system updates, 

staff training, and compliance 

monitoring; costs that would likely be 

passed on in one form or another to 

consumers.’’ One commenter asserted 

the adjustments would be 

‘‘operationally difficult, if not 

impossible.’’ Three commenters 

(including two of the aforementioned 

commenters asserting burden) requested 

a longer implementation period due to 

the added complications of the COVID 

pandemic and the upcoming 

replacement of the London InterBank 

Offered Rate (LIBOR) index with the 

Secured Overnight Financing Rate 

(SOFR) index. 

Several other commenters stated that 

the special rule would adversely affect 

the market for GSE short-reset ARMs 

that have been developed specifically 

for the new SOFR index and that such 

ARMs likely would be unable to achieve 

QM status under the special rule. 

In addition to these SOFR-related 

market concerns, many other 

commenters more generally asserted 

that the special rule would limit or 

eliminate QM eligibility for some or all 

short-reset ARMs. Of these commenters, 

seven predicted that the special rule 

would eliminate or at least reduce shortreset ARM originations. Three industry 

commenters predicted that the special 

rule would result in total elimination of 

short-reset ARM originations. Four other 

commenters predicted that the special 

rule would prevent origination of at 

least some short-reset ARMs, with two 

asserting that five-year ARMs would be 

eliminated and one specifying that 

three-year ARMs would be eliminated. 

Several commenters recommended 

that the Bureau restrict the scope of the 

special rule—either to exclude five-year 

ARMs from coverage or to restrict the 

scope to short-reset ARMs with an 

initial fixed-rate period of less than five 

years, three years, or two years. Some of 

these commenters urged the Bureau to 

exclude five-year ARMs from coverage 

and others recommended narrowing the 

scope of the special rule to three-year 

ARMs (or shorter). Some commenters 

recommended excluding from coverage 

ARMs that reset after exactly five years 

or, in the alternative, excluding from 

coverage ARMs with initial terms of 

three years or less. One commenter 

recommended narrowing the special 

rule to apply to ARMs with an initial 

period of two years or less. 

Several commenters recommended 

that the Bureau adopt an alternative to 

the proposed special rule. One industry 

commenter recommended setting the 

QM rate-spread threshold for ARMs in 

a manner that references the maximum 

interest rate possible in the first five 

years. The commenter suggested, as an 

example, requiring that the maximum 

interest rate possible in the first five 

years be within a given rate spread of 

APOR. Similarly, another industry 

commenter recommended that the 

Bureau adopt a separate qualification 

test that compares the maximum 

interest rate possible in the first five 

years to the APOR plus an appropriate 

threshold. 

Three commenters, including a 

consumer advocate and a coalition of 

industry and consumer advocates, 

recommended adopting a different 

special rule that uses the Average Initial 

Interest Rate (AIIR) instead of APOR as 

the comparison rate. The Bureau 

understands that commenters are using 

AIIR to refer to the mean initial interest 

rate for a particular ARM product, 

which is one input into the APOR 

calculation for ARMs. Another 

commenter recommended removing QM 

eligibility for most short-reset ARMs 

but, in the alternative, supported the 

special rule using AIIR. These 

commenters generally maintained that a 

special rule employing AIIR would ease 

implementation and preserve the 

availability of short-reset ARMs for 

certain consumers while still protecting 

them from payment shock. As described 

by commenters, the AIIR special rule 

would be one part of a two-part test. 

First, creditors would be required to 

compare the maximum interest rate in 

the first five years with the AIIR for a 

comparable ARM product, plus 2.5 

percent, regardless of loan size. If the 

maximum possible rate is less than or 

equal to the AIIR plus 2.5 percent, the 

loan potentially would be eligible for 

QM status. Second, loans satisfying the 

initial test would then be subject to the 

same APR-to-APOR rate-spread tests as 

other loans under the General QM rule 

for purposes of determining whether the 

loans are safe harbor QMs, rebuttable 

presumption QMs, or non-QM loans 

under the applicable thresholds. 

Three industry commenters 

recommended a different special rule 

for short-reset ARMs. They 

recommended that the Bureau establish 

‘‘reasonable secondary caps for rate 


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86376 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

323Regulation Z requirements for calculating the 

APR for ARMs are summarized below in the 

discussion of the structure and pricing particular to 

ARMs. 

324As discussed above, the Bureau is also 

finalizing § 1026.43(b)(4), an identical special rule 

for determining the APR for certain loans for which 

the interest rate may or will change, which applies 

under that paragraph for purposes of determining 

whether a QM under § 1026.43(e)(2) is a higherpriced covered transaction. 

325 In addition to short-reset ARMs, the special 

rule applies to step-rate mortgages that have an 

initial fixed-rate period of five years or less. The 

Bureau recognizes that the interest rates of step-rate 

mortgages are known at consummation. However, 

unlike fixed-rate mortgages and akin to ARMs, the 

interest rate of step-rate mortgages changes, thereby 

raising the concern that interest-rate increases 

relatively soon after consummation may present 

affordability risks due to higher loan payments. 

Moreover, applying the APR determination 

requirement to such loans is consistent with the 

treatment of step-rate mortgages pursuant to the 

requirement in the General QM loan definition to 

underwrite loans using the maximum interest rate 

during the first five years after the date on which 

the first regular periodic payment will be due. See 

comment 43(e)(2)(iv)–3.iii. 

326See 12 CFR 1026.17(c)(1) through (8). 

327See 12 CFR 1026.17(c)(1) through (10). 

328See TILA section 103(bb)(1)(B)(ii). 

changes allowed within the short-reset 

period’’ such that short-reset ARMs 

meeting those caps would be eligible for 

QM status. These commenters did not 

specify their views on what caps on 

interest rate resets would be reasonable. 

In the alternative, these commenters, 

plus a GSE, recommended that the 

Bureau require creditors to use the fully 

indexed rate for the remaining loan term 

after the first five years (rather than the 

highest possible interest rate in the first 

five years) to calculate the APR for 

short-reset ARMs. Although these 

commenters did not specify which 

interest rate to use for the first five 

years, the Bureau understands this 

approach to be similar to the APR 

calculation for ARMs in § 1026.17(c)(1), 

which requires the creditor to disclose 

a composite APR based on the initial 

rate for as long as it is charged and, for 

the remainder of the term, on the fully 

indexed rate.323 In a variation of this 

approach, another GSE recommended 

that the Bureau adopt that GSE’s own 

requirements for short-reset ARMs in 

lieu of the special rule. Specifically, the 

GSE recommended that the Bureau 

require creditors to calculate the APR 

using the greater of the fully indexed 

rate or 2 percent over the initial note 

rate for the full term of the loan. 

The Final Rule 

For the reasons set forth herein, the 

Bureau is finalizing as proposed the 

revisions to § 1026.43(e)(2)(vi) and 

comment 43(e)(2)(vi)–4 regarding the 

special rule for determining the APR for 

certain types of loans for purposes of 

whether a loan meets the General QM 

loan definition under § 1026.43(e)(2). 

This special rule applies to loans for 

which the interest rate may or will 

change within the first five years after 

the date on which the first regular 

periodic payment will be due. For such 

loans, for purposes of determining 

whether the loan is a General QM under 

§ 1026.43(e)(2)(vi), the creditor is 

required to determine the APR by 

treating the maximum interest rate that 

may apply during that five-year period 

as the interest rate for the full term of 

the loan.324 The special rule applies 

principally to ARMs with initial fixedrate periods of five years or less 

(referred to herein as ‘‘short-reset 

ARMs’’).325 The Bureau concludes that 

the risks associated with short-reset 

ARMs can be effectively addressed 

without prohibiting them from receiving 

General QM status altogether. This 

conclusion is consistent with the fact 

that the Dodd-Frank Act expressly states 

that short-reset ARMs are eligible for 

General QM status and includes a 

specific provision for addressing the 

potential for payment shock from such 

loans. 

Careful consideration of its data and 

rationale, and of comments received, 

leads the Bureau to conclude that while 

the price-based approach to defining 

General QMs is generally effective in 

identifying which loans consumers have 

the ability to repay and should therefore 

be eligible for QM status under 

§ 1026.43(e)(2), the special rule is 

necessary to effectively capture specific 

unaffordability risks of certain shortreset ARMs. The Bureau further 

concludes that the burden of 

implementing the special rule is not 

unreasonable, as discussed further 

below, given that all of the inputs 

needed to calculate the special rule’s 

APR—including the five year maximum 

interest rate—are already required under 

existing provisions in Regulation Z and 

that creditors can offer short-reset ARMs 

that satisfy the new General QM pricing 

requirements under the special rule. 

As a general matter, as discussed 

above, the Bureau is adopting in this 

final rule a non-QM threshold for loans 

greater than or equal to $110,260 that is 

higher than the threshold that it 

proposed. Specifically, § 1026.43(e)(2) 

provides that loans greater than or equal 

to $110,260 may be eligible for QM 

status if the APR does not exceed APOR 

2.25 or more percentage points. The 

Bureau notes that this change will 

increase the pool of loans that achieve 

QM status under the ATR/QM Rule, 

including short-reset ARMs subject to 

the special rule. Thus, the 2.25- 

percentage-point threshold under this 

final rule will result in more short-reset 

ARMs achieving QM status than would 

have under the 2-percentage-point 

threshold in the proposal. While shortreset ARMs offer consumers who can 

afford them an important alternative to 

fixed-rate mortgage loans, the Bureau 

estimates that the special rule will apply 

to a relatively small percentage of the 

mortgage market. Based on 2018 HMDA 

data, the Bureau estimates that 

approximately 36,000 conventional 

purchase loans, or approximately 1.3 

percent of conventional purchase loans 

in the U.S. mortgage market, would 

have been subject to the special rule had 

it been in effect that year. 

Structure and pricing particular to 

ARMs. As explained in the proposal, 

absent special treatment, short-reset 

ARMs may present particular concerns 

under an approach that uses APR as an 

indicator of ability to repay. Short-reset 

ARMs may be affordable for the initial 

fixed-rate period but may become 

unaffordable relatively soon after 

consummation if the payments increase 

appreciably after reset, causing payment 

shock. The APR for short-reset ARMs is 

not as predictive of ability to repay as 

for fixed-rate mortgages because of how 

ARMs are structured and priced and 

how the APR for ARMs is determined 

under various provisions in Regulation 

Z. Several different provisions in 

Regulation Z address the calculation of 

the APR for ARMs. For disclosure 

purposes, if the initial interest rate is 

determined by the index or formula to 

make later interest rate adjustments, 

Regulation Z generally requires the 

creditor to base the APR disclosure on 

the initial interest rate at consummation 

and to not assume that the rate will 

increase during the remainder of the 

loan.326 In some transactions, including 

many ARMs, the creditor may set an 

initial interest rate that is lower (or, less 

commonly, higher) than the rate would 

be if it were determined by the index or 

formula used to make later interest rate 

adjustments. For these ARMs, 

Regulation Z requires the creditor to 

disclose a composite APR based on the 

initial rate for as long as it is charged 

and, for the remainder of the term, on 

the fully indexed rate.327 The fully 

indexed rate at consummation is the 

sum of the value of the index at the time 

of consummation plus the margin, based 

on the contract. The Dodd-Frank Act 

requires a different APR calculation for 

ARMs for the purpose of determining 

whether ARMs are subject to certain 

HOEPA requirements.328 As 

implemented in § 1026.32(a)(3)(ii), the 

creditor is required to determine the 


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329See 12 CFR 1026.32(a)(3)–3. 

330The lower absolute pricing of ARMs with 

comparable credit risk is reflected in the lower 

ARM APOR, which is typically 50 to 150 basis 

points lower than the fixed-rate APOR. 

331Bureau analysis of NMDB data shows crisisera short-reset ARMs had lower LTV ratios at 

consummation relative to comparably priced fixedrate loans. 332This approach for ARMs is different from the 

approach in § 1026.43(c)(5) for underwriting ARMs 

under the ATR requirements, which, like the APR 

determination for HOEPA coverage for ARMs under 

§ 1026.32(a)(3), is based on the greater of the fully 

indexed rate or the initial rate. 

333As discussed below in the Legal Authority 

section, the Bureau is exercising its adjustment and 

revision authorities to amend § 1026.43(e)(2)(vi) to 

provide that, to determine the APR for short-reset 

ARMs for purposes of General QM status, the 

creditor must treat the maximum interest rate that 

may apply during that five-year period as the 

interest rate for the full term of the loan. The 

Bureau observes that the requirement in TILA 

section 129C(b)(2)(A)(v) to underwrite ARMs for 

QM purposes using the maximum interest rate that 

may apply during the first five years is at least 

ambiguous with respect to whether it 

independently obligates the creditor to determine 

the APR for short-reset ARMs in the same manner 

as the special rule, at least when the Bureau relies 

on pricing thresholds as the primary indicator of 

likely repayment ability in the General QM loan 

definition. Furthermore, the Bureau concludes that 

it would be reasonable, in light of the definition of 

a General QM and in light of the policy concerns 

already described, to construe TILA section 

129C(b)(2)(A)(v) as imposing the same obligations 

as the special rule in § 1026.43(e)(2)(vi). Thus, in 

addition to relying on its adjustment and revision 

authorities to amend § 1026.43(e)(2)(vi), the Bureau 

concludes that it may do so under its general 

authority to interpret TILA in the course of 

prescribing regulations under TILA section 105(a) 

to carry out the purposes of TILA. 

APR for HOEPA coverage for 

transactions in which the interest rate 

may vary during the term of the loan in 

accordance with an index, such as with 

an ARM, by using the fully indexed rate 

or the introductory rate, whichever is 

greater.329

The requirements in Regulation Z for 

determining the APR for disclosure 

purposes and for HOEPA coverage 

purposes do not account for any 

potential increase or decrease in interest 

rates based on changes to the underlying 

index. If interest rates rise after 

consummation, and therefore the value 

of the index rises to a higher level, the 

loan can reset to a higher interest rate 

than the fully indexed rate at the time 

of consummation. The result would be 

a higher payment than the one 

calculated based on the rates used in 

determining the APR, and a higher 

effective rate spread (and increased 

likelihood of delinquency) than the 

spread that would be taken into account 

for determining General QM status at 

consummation under the price-based 

approach in the absence of a special 

rule. 

ARMs can present more risk for 

consumers than fixed-rate mortgages, 

depending on the direction and 

magnitude of changes in interest rates. 

In the case of a 30-year fixed-rate loan, 

creditors or mortgage investors assume 

both the credit risk and the interest-rate 

risk (i.e., the risk that interest rates rise 

above the fixed rate the consumer is 

obligated to pay), and the price of the 

loan, which is fully captured by the 

APR, reflects both risks. In the case of 

an ARM, the creditor or investor 

assumes the credit risk of the loan, but 

the consumer assumes most of the 

interest-rate risk, as the interest rate will 

adjust along with the market. The extent 

to which the consumer assumes the 

interest-rate risk is established by caps 

in the note on how high the interest rate 

charged to the consumer may rise. To 

compensate for the added interest-rate 

risk assumed by the consumer (as 

opposed to the creditor or investor), 

ARMs are generally priced lower—in 

absolute terms—than a 30-year fixedrate mortgage with comparable credit 

risk.330 Yet with rising interest rates, the 

risks that ARMs could become 

unaffordable, and therefore lead to 

delinquency or default, are more 

pronounced. As noted above, the 

requirements for determining the APR 

for ARMs in Regulation Z do not reflect 

this risk because they do not take into 

account potential increases in the 

interest rate over the term of the loan 

based on changes to the underlying 

index. This APR may therefore 

understate the risk that the loan may 

become unaffordable to the consumer if 

interest rates increase. 

Unaffordability risk more acute for 

short-reset ARMs. As the Bureau noted 

in the proposal, short-reset ARMs may 

present greater risks of unaffordability 

than other ARMs. While all ARMs run 

the risk of increases in interest rates and 

payments over time, longer-reset ARMs 

(i.e., ARMs with initial fixed-rate 

periods of longer than five years) 

present a less acute risk of 

unaffordability than short-reset ARMs. 

Longer-reset ARMs permit consumers to 

take advantage of lower interest rates for 

more than five years and thus, akin to 

fixed-rate mortgages, provide consumers 

significant time to pay off or refinance, 

or to otherwise adjust to anticipated 

changes in payment during the 

relatively long period during which the 

interest rate is fixed and before 

payments may increase. 

Short-reset ARMs can also contribute 

to speculative lending because they 

permit creditors to originate loans that 

could be affordable in the short term, 

with the expectation that property 

values will increase and thereby permit 

consumers to refinance before payments 

may become unaffordable. Further, 

creditors can minimize their credit risk 

on such ARMs by, for example, 

requiring lower LTV ratios, as was 

common in the run-up to the 2008 

financial crisis.331 Additionally, 

creditors may be more willing to market 

these ARMs in areas of strong housingprice appreciation, irrespective of a 

consumer’s ability to absorb the 

potentially higher payments after reset, 

because creditors may expect that 

consumers will have the equity in their 

homes to refinance if necessary. 

In the Dodd-Frank Act, Congress 

addressed affordability concerns 

specific to short-reset ARMs and their 

eligibility for QM status by providing in 

TILA section 129C(b)(2)(A)(v) that, to 

receive QM status, ARMs must be 

underwritten using the maximum 

interest rate that may apply during the 

first five years.332 The ATR/QM Rule 

implemented this requirement in 

Regulation Z at § 1026.43(e)(2)(iv). For 

many short-reset ARMs, this 

requirement resulted in a higher DTI 

that would have to be compared to the 

Rule’s 43 percent DTI limit to determine 

whether the loans were eligible to 

receive General QM status. Particularly 

in a higher-rate environment in which 

short-reset ARMs could become more 

attractive, the five-year maximum 

interest-rate requirement, combined 

with the Rule’s 43 percent DTI limit, 

would have likely prevented some of 

the riskiest short-reset ARMs (i.e., those 

that adjust sharply upward in the first 

five years and cause payment shock) 

from obtaining General QM status. As 

discussed above, the Bureau is 

finalizing a price-based approach that 

removes the DTI limit from the General 

QM loan definition in 

§ 1026.43(e)(2)(vi). As a result, the 

Bureau finds that, without the special 

rule, a price-based approach would not 

adequately address the risk that 

consumers taking out short-reset ARMs 

may not have the ability to repay those 

loans but that such loans would 

nonetheless be eligible for General QM 

status under § 1026.43(e)(2).333

The price-based approach to 

addressing affordability concerns. As 

noted in the proposal, the Bureau’s 

analysis of historical ARM pricing and 

performance indicates that the General 

QM product restrictions combined with 

the price-based approach would have 

effectively excluded many—but not 

all—of the riskiest short-reset ARMs 

from obtaining General QM status. As a 

result, the Bureau concludes that an 

additional mechanism is merited to 

exclude from the General QM loan 

definition these short-reset ARMs for 


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86378 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

334Many ARMs in the data during this period do 

not report the time between consummation and the 

first interest-rate reset, and so are excluded from 

this analysis. 

335Laurie Goodman et al., Urban Inst., Housing 

Finance at a Glance, at 9 (Sept. 2020), https://

www.urban.org/sites/default/files/publication/ 

102979/september-chartbook-2020.pdf. 

336Assessment Report, supra note 63, at 94 (fig. 

25). 

337 Id. at 93–95. 

338 Id. at 95 (fig. 26). 

339As noted above, the special rule also applies 

to step-rate mortgages for which the interest rate 

changes in the first five years. 

340 12 CFR 1026.43(e)(2)(iv). 

which the pricing and structure indicate 

a risk of delinquency that is inconsistent 

with the presumption of compliance 

with the ATR requirements that comes 

with QM status. 

The Bureau’s analysis of NMDB data 

shows that short-reset ARMs originated 

from 2002 through 2008 had, on 

average, substantially higher early 

delinquency rates (14.9 percent) than 

other ARMs (10.1 percent) or than fixedrate mortgages (5.4 percent). Many of 

these short-reset ARMs were also 

substantially higher-priced relative to 

APOR and more likely to have product 

features that TILA and the ATR/QM 

Rule now prohibit for QMs, such as 

interest-only payments or negative 

amortization. In considering only loans 

without such restricted features and 

with rate spreads within 2 percentage 

points of APOR (the proposed non-QM 

threshold), short-reset ARMs still have 

the highest average early delinquency 

rate (5.5 percent), but the difference 

relative to other ARMs (4.3 percent) and 

fixed-rate mortgages (4.2 percent) is 

smaller. While not a factor in the 

Bureau’s decision to finalize the special 

rule as proposed, the Bureau’s analysis 

of early delinquency rates of loans 

without restricted features and with rate 

spreads within 2.25 percentage point of 

APOR (the non-QM threshold under the 

Final Rule) yields similar results, 

though the delinquency rates for shortreset ARMs as compared to all other 

loans are slightly higher. Under that 

analysis, the early delinquency rate for 

short-reset ARMs is 6.2 percent as 

compared to 4.4 percent for all other 

ARMs and 4.3 percent for fixed-rate 

mortgages.334

In the proposal, the Bureau requested 

additional data or evidence comparing 

loan performance of short-reset ARMs, 

other ARMs, and fixed-rate mortgages, 

as well as data comparing the 

performance of such loans during 

periods of rising interest rates. In 

response, a few commenters stated that 

their internal data for loans originated 

post-crisis—in an environment of 

relatively low interest rates—showed 

generally comparable delinquency rates 

between certain ARMs and fixed-rate 

mortgages. Those delinquency rates are 

generally consistent with those reflected 

in the data on which the Bureau relied, 

in part, to propose the special rule. No 

commenters, however, provided data on 

comparative loan performance during 

periods of rising interest rates—which, 

as discussed herein, is the interest-rate 

environment for which the special rule’s 

additional safeguards are primarily 

designed. The Bureau recognizes that 

rising interest rates may also pose some 

risk of unaffordability for longer-reset 

ARMs later in the loan term. However, 

as also discussed herein, the Bureau is 

finalizing the special rule to address the 

specific concern that short-reset ARMs 

pose a higher risk than other ARMs of 

becoming unaffordable in the first five 

years, before consumers have sufficient 

time to refinance or adjust to the larger 

payments—a concern Congress also 

identified in the Dodd-Frank Act. Shortreset ARMs have the potential for a 

significant interest rate increase early in 

the loan term and present concerns that 

the payments may therefore become 

unaffordable. Commenters did not 

present evidence controverting that 

short-reset ARMs may present particular 

risks. Indeed, most commenters 

acknowledged that short-reset ARMs do 

in fact present additional concerns 

about affordability. 

A combination of factors postfinancial crisis—including a sharp drop 

in ARM originations and the restriction 

of such originations to highly 

creditworthy borrowers, as well as the 

prevalence of low interest rates—likely 

has muted the overall risks of short-reset 

ARMs. During the peak of the mid2000s housing boom, ARMs accounted 

for as much as 52 percent of all new 

originations. In contrast, the current 

market share of ARMs is relatively 

small. Post-crisis, the ARM share had 

declined to 12 percent by December 

2013 and to 1.4 percent by July 2020, 

only slightly above the historical low of 

1 percent in 2009.335 One major factor 

contributing to the overall decline in 

ARM volume is the low-interest-rate 

environment since the end of the 

financial crisis. Typically, ARMs are 

more popular when conventional 

interest rates are high, since the rate 

(and monthly payment) during the 

initial fixed period is typically lower 

than the rate of a comparable 

conventional fixed-rate mortgage. 

Consistent with TILA section 

129C(b)(2)(A), the January 2013 Final 

Rule prohibited ARMs with higher-risk 

features such as interest-only payments 

or negative amortization from receiving 

General QM status. According to the 

Assessment Report, short-reset ARMs 

comprised 17 percent of ARMs in 2012, 

prior to the January 2013 Final Rule, 

and fell to 12.3 percent in 2015, after the 

effective date of the Rule.336 The 

Assessment Report also found that 

short-reset ARMs originated after the 

effective date of the Rule were restricted 

to highly creditworthy borrowers.337

The Assessment Report further found 

that conventional, non-GSE short-reset 

ARMs originated after the effective date 

of the Rule had early delinquency rates 

of only 0.2 percent.338 Due to the postcrisis low interest rate environment and 

restriction of ARM originations to 

highly creditworthy borrowers, these 

recent originations may not accurately 

reflect the potential unaffordability of 

short-reset ARMs under different market 

conditions than those that currently 

prevail. 

Special rule for APR determination 

for short-reset ARMs.339 Given the 

potential that rising interest rates could 

cause short-reset ARMs to become 

unaffordable for consumers following 

consummation and the fact that the 

price-based approach does not account 

for some of those risks because of how 

APRs are determined for ARMs, the 

Bureau is finalizing the proposed 

special rule to determine the APR for 

short-reset ARMs for purposes of 

defining General QM under 

§ 1026.43(e)(2). As noted above, in 

defining QM in TILA, Congress adopted 

a special requirement to address 

affordability concerns for short-reset 

ARMs. Specifically, TILA provides that, 

for an ARM to be a QM, the 

underwriting must be based on the 

maximum interest rate permitted under 

the terms of the loan during the first five 

years. With the 43 percent DTI limit in 

the current ATR/QM Rule, 

implementing the five-year 

underwriting requirement is 

straightforward: The Rule requires a 

creditor to calculate DTI using the 

mortgage payment that results from the 

maximum possible interest rate that 

could apply during the first five 

years.340 This ensured that the creditor 

calculates the DTI using the highest 

interest rate that the consumer may 

experience in the first five years, and 

the loan is not eligible for QM status 

under § 1026.43(e)(2) if the DTI 

calculated using that interest rate 

exceeds 43 percent. The Bureau 

concludes that using the fully indexed 

rate to determine the APR for purposes 

of the rate-spread thresholds in 

§ 1026.43(e)(2)(vi) as finalized would 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86379 

341This refers to the standard APOR for ARMs. 

The requirement modifies the determination for the 

APR of ARMs but does not affect the determination 

of the APOR. The Bureau notes that the APOR used 

for step-rate mortgages is the ARM APOR because, 

as with ARMs, the interest rate in step-rate 

mortgages adjusts and is not fixed. Thus, the APOR 

for fixed-rate mortgages would be inapt. 

not provide a sufficiently meaningful 

safeguard against the elevated 

likelihood of delinquency for short-reset 

ARMs. For that reason, the Bureau is 

finalizing the proposed special rule for 

determining the APR for such loans. 

The Bureau concludes the statutory 

five-year underwriting requirement 

provides a basis for the special rule for 

determining the APR for short-reset 

ARMs for purposes of General QM ratespread thresholds under § 1026.43(e)(2). 

Specifically, under the special rule, the 

creditor must determine the APR by 

treating the maximum interest rate that 

may apply during the first five years, as 

described in § 1026.43(e)(2)(vi), as the 

interest rate for the full term of the loan. 

That APR determination is then 

compared to the APOR341 to determine 

General QM status. This approach 

addresses in a targeted manner the 

primary concern about short-reset 

ARMs—payment shock—by accounting 

for the risk of delinquency and default 

associated with payment increases 

under these loans. And it would do so 

in a manner that is consistent with the 

five-year framework embedded in TILA 

for such ARMs and implemented in the 

current ATR/QM Rule. 

In sum, the Bureau finds that the 

special rule is consistent with both 

TILA’s statutory mandate for short-reset 

ARMs and the proposed price-based 

approach. As discussed above in part V, 

the rate spread of APR over APOR is 

strongly correlated with early 

delinquency rates. As a result, such rate 

spreads may generally serve as an 

effective indicator for a consumer’s 

ability to repay. However, the structure 

and pricing of ARMs can result in early 

interest rate increases that are not fully 

accounted for in Regulation Z 

provisions for determining the APR for 

ARMs. Such increases could diminish 

the effectiveness of the rate spread as an 

indicator and lead to heightened risk of 

early delinquency for short-reset ARMs 

relative to other loans with comparable 

APR over APOR rate spreads. The 

special rule, by requiring creditors to 

more fully incorporate this interest-rate 

risk in determining the APR for shortreset ARMs, will more fully ensure that 

the resulting pricing accounts for that 

risk for such loans. 

The special rule requires that the 

maximum interest rate in the first five 

years be treated as the interest rate for 

the full term of the loan to determine 

the APR. The Bureau concludes that a 

composite APR determination based on 

the maximum interest rate in the first 

five years and the fully indexed rate for 

the remaining loan term could 

understate the APR for short-reset ARMs 

by failing to sufficiently account for the 

risk that consumers with such loans 

could face payment shock early in the 

loan term. Accordingly, to account for 

that risk, and to ensure that the QM 

presumption of compliance is accorded 

to short-reset ARMs for which the 

consumer has the ability to repay, the 

Bureau is requiring that the APR for 

short-reset ARMs be based on the 

maximum interest rate during the first 

five years. 

Commenter criticism of the special 

rule: Burden and market effects. As 

noted above, commenter criticism of the 

proposed special rule generally fell into 

two categories: (1) The special rule 

would be overly burdensome; and (2) 

because some ARMs allow up to a 2 

percentage point increase at the first 

reset, the special rule would limit or 

eliminate QM eligibility for some or all 

short-reset ARMs—with some 

commenters predicting that, as a result, 

some or all short-reset ARMs would 

cease to be offered in the marketplace. 

With regard to the first criticism, 

some commenters asserted that the 

special rule would increase burden by 

adding operational complexity and 

compliance uncertainty. These 

commenters provided no further 

explanation or data to justify their 

claims. The Bureau recognizes that the 

special rule’s APR calculation is a new 

regulatory requirement. However, the 

Bureau concludes that its special rule 

addresses the risk posed by short-reset 

ARMs without adding unreasonable 

burden. Cognizant of reducing burden 

resulting from calculating a new APR, 

the Bureau proposed the special rule, in 

part, because it parallels the 

underwriting requirement in existing 

§ 1026.43(e)(2)(iv), which already 

requires creditors to calculate the fiveyear maximum interest rate for shortreset ARMs. As such, the special rule’s 

APR calculation is based on an input 

already required for short-reset ARMs 

under the underwriting calculation. 

Moreover, creditors already have all of 

the other inputs required for the special 

rule’s APR calculation from existing 

APR regulatory requirements. The 

Bureau expects that these factors will 

mitigate the burden of implementing 

systems changes to comply with the 

special rule. The Bureau also notes that 

the different APR calculation required 

under § 1026.32(a)(3)(ii) for purposes of 

determining whether ARMs are subject 

to certain HOEPA requirements has not 

resulted in compliance uncertainty. 

Three commenters raised concerns 

that adapting to the special rule would 

be burdensome because it would 

overlap with the transition from the 

LIBOR index to the SOFR index (and 

because of the pandemic) and therefore 

requested a longer implementation 

period. The implementation period of 

the Final Rule is addressed in part VII 

below. 

A few other commenters stated that 

the special rule would adversely affect 

the market for GSE short-reset ARMs 

that have been developed specifically 

for the new SOFR index, and that such 

ARMs likely would be unable to obtain 

QM status under the special rule. The 

Bureau notes that the special rule does 

not depend on which index a creditor 

uses to determine the interest rate of a 

short-reset ARM. Thus, the transfer from 

LIBOR ARMs to SOFR ARMs has no 

effect on the application of the special 

rule, as it is the structure of the rate 

resets permitted under the contract 

within the first five years that will 

determine the maximum interest rate for 

the purposes of calculating the APR 

under the special rule. Creditors offering 

ARM products, including short-reset 

ARMs, will have to complete the work 

to transition from LIBOR to SOFR 

regardless of the parameters of the 

Bureau’s special rule. Moreover, the 

Bureau understands that the 2 

percentage point cap on the initial reset 

of most GSE short-reset ARMs is the 

same for both GSE LIBOR ARMs and 

GSE SOFR ARMs. While the current 

ATR/QM Rule’s GSE Patch granted QM 

status to all GSE-eligible ARMs, under 

this final rule, GSE ARMs will require 

similar adjustments due to their rate 

reset caps in order to qualify for QM 

status—regardless of which index is 

used. Further, the Bureau notes that 

only approximately 5 percent of 2018 

conventional purchase ARMs that 

would have been subject to the special 

rule were GSE loans. In sum, the Bureau 

recognizes the operational challenges 

posed by the transition from LIBOR to 

SOFR, but the Bureau finds that the 

special rule would not exacerbate these 

challenges and that these challenges are 

unrelated to the types of ARMs that 

qualify for a QM presumption of 

compliance under the special rule. 

With respect to the remaining 

criticisms of the special rule’s projected 

market effects, commenters claimed 

that, because some short-reset ARMs 

allow up to a 2 percentage point 

increase at the first reset, the special 

rule would limit or eliminate QM 

eligibility for some or all short-reset 

ARMs. A few of these commenters 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
86380 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

342Fannie Mae, Standard ARM Plan Matrix for 

2020 (Apr. 2020), https://singlefamily.

fanniemae.com/media/6951/display. 

343 VA caps all interest rate increases at 1 percent 

a year for all VA ARMS. FHA caps interest rate 

increases at 1 percent for one-year and three-year 

ARMs. FHA caps annual interest rate increases at 

1 percent for a lifetime cap of 5 percent or 2 percent 

increases for a lifetime cap of 6 percent. 

further predicted that, as a result, some 

or all short-reset ARMs would cease to 

be offered in the marketplace. These 

commenters did not provide additional 

data or evidence to support their 

projections. As discussed above, the 

Bureau is increasing the rate-spread 

threshold for eligibility under the 

General QM loan definition from the 

proposed 2-percentage-point threshold 

to 2.25 percentage points for loans less 

than or equal to $110,260. As a result of 

this increased threshold, more shortreset ARMs will achieve QM status than 

would have under the proposal. This is 

especially true for many five-year 

ARMs, including existing GSE five-year 

ARMs, which under the proposed 

special rule might have required 

modifications to the current interest rate 

cap to obtain QM status. Under the 2.25- 

percentage-point threshold, many of 

these loans may qualify as QMs as 

currently structured. Because most GSE 

five-year ARMs (both LIBOR and SOFR) 

provide for a 2 percentage point cap on 

the first reset, many of these short-reset 

ARMs will fall within the new QM 

threshold. Due to this increased 

threshold, any five-year ARM with an 

initial APR within 0.25 percentage 

points of the APOR at origination can 

have an initial adjustment of up to 2 

percent and still qualify as a QM under 

the special rule. 

The Bureau recognizes that, because 

the QM safe harbor threshold remains 

unchanged, many of the short-reset 

ARMs that achieve QM status under the 

Final Rule’s expanded spread will 

receive a rebuttable presumption of 

compliance rather than a conclusive 

presumption. Due to the risk that these 

short-reset ARMs (i.e., those with 

relatively high interest rate caps) may 

become unaffordable after early resets, 

the Bureau concludes that rebuttable 

presumption status, as opposed to safe 

harbor status, is appropriate for such 

loans. Furthermore, according to the 

Bureau’s evidence, as discussed in the 

proposal and above, the fact that many 

of these loans may qualify only for a 

rebuttable presumption and not a safe 

harbor is not likely to have a significant 

impact on access to responsible, 

affordable mortgage credit. As discussed 

in more detail above, creditors readily 

make rebuttable presumption QMs, thus 

indicating that the non-QM threshold is 

the more relevant threshold in 

determining access to responsible, 

affordable mortgage credit under the 

General QM amendments. 

The Bureau is aware that the increase 

in the rate-spread threshold will have a 

greater impact on QM eligibility of fiveyear ARMs as compared to three-year 

ARMs. For example, GSE three-year 

ARMs permit interest rate increases as 

high as 6 percentage points in the first 

five years and as such likely will not 

qualify for General QM status. The 

Bureau notes that the purpose of the 

special rule is to ensure that General 

QM status will not be accorded to 

certain loans for which the interest rate 

may sharply increase in the first five 

years, resulting in pricing that exceeds 

the non-QM threshold in this final rule 

and in potentially unaffordable 

payments. Consistent with this purpose, 

the special rule would preclude such 

loans from obtaining General QM status, 

including many three-year ARMs with 

interest rates that may increase by as 

much as 6 percentage points in the first 

five years. Loans for which the interest 

rate may increase so sharply early in the 

term of the loan do not warrant the 

General QM presumption of compliance 

with the ATR requirements. 

To the extent the increased ratespread threshold does not address 

commenter concerns with regard to 

access to credit, the Bureau notes that 

creditors can and do market QM-eligible 

ARMs that either satisfy the 

requirements of the special rule by not 

permitting resets above 2.25 percentage 

points within the first five years or that 

fall outside the purview of the special 

rule by resetting later than five years (60 

months) after the first payment is due. 

Market participants currently originate 

some five-year ARMs with sufficiently 

low initial reset caps or with an initial 

reset that occurs shortly after 60 

months. For example, the definition of 

a GSE five-year ARM allows an initial 

fixed-rate period of up to 66 months.342

Thus, GSEs and creditors can offer 

ARMs that satisfy the General QM 

pricing requirements under the special 

rule or that fall outside the scope of the 

special rule. Also, while interest rate 

reset data for privately-held non-agency 

loans is not reliably available, the 

Bureau notes that both FHA and VA 

ARMs, although subject to their own 

agency QM rules, contain interest rate 

reset caps that would fall within the 

parameters of the special rule as 

finalized.343

A few commenters asked for 

clarification of certain aspects of the 

special rule. One commenter requested 

that the Bureau clarify whether the 

special rule applies to five-year ARMs. 

Specifically, the commenter asked for 

clarification as to whether the first 

interest rate reset of a five-year ARM is 

included in the special rule’s APR 

calculation, given the special rule’s 

applicability to loans for which the 

interest rate may or will change within 

the first five years after the date on 

which the first regular periodic payment 

will be due. To the extent that the first 

interest rate reset of a five-year ARM 

occurs on the five-year anniversary of 

the due date of the first periodic 

payment, such ARMs are subject to the 

special rule. As noted in the proposal, 

the special rule is identical in this 

regard to the existing underwriting 

requirement for short-reset ARMs in 

§ 1026.43(e)(2)(iv). Also, comment 

43(e)(2)(vi)–4.ii, which the Bureau is 

finalizing as proposed, clarifies that the 

special rule applies to five-year ARMs. 

One commenter posed several 

questions concerning how the special 

rule applies to certain loan products or 

in various factual scenarios. To the 

extent that the commenter’s questions 

are not addressed in the final rule, the 

Bureau notes that it has a variety of 

tools for answering such questions once 

a final rule is issued, including external 

guidance materials and an informal 

guidance function. 

Commenter recommendations. 

Commenters that criticized the special 

rule generally recommended one of two 

ways to address their criticisms: Narrow 

the scope of the special rule or 

substitute an alternative special rule. 

Some commenters recommended 

narrowing the scope of the special rule 

to expand the number of short-reset 

ARMs that obtain QM status—either to 

exclude five-year ARMs from coverage 

or to restrict the scope to short-reset 

ARMs with an initial fixed-rate period 

of less than five years, three years, or 

two years. The Bureau declines to adopt 

these recommendations and is finalizing 

the special rule as proposed to cover 

short-reset ARMs with initial fixed-rate 

periods of five years or less, for the 

following reasons and those discussed 

above. 

The majority of these commenters 

specifically recommended excluding 

five-year ARMs from coverage. The 

Bureau notes that coverage of the 

special rule is already relatively narrow. 

Including five-year ARMs, the Bureau 

estimates that the special rule would 

apply to 36,000 conventional purchase 

loans annually, according to 2018 

HMDA data. Excluding five-year ARMs 

from the scope of the special rule would 

reduce that number to 3,500 loans. 

Further, as discussed above, because the 

Bureau is increasing the rate-spread 

threshold from 2 percentage points to 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86381 

344 12 CFR 1026.43(e)(2)(iv). 

2.25 percentage points for loans greater 

than or equal to $110,260, more fiveyear ARMs will obtain QM status under 

the special rule as finalized. 

The Bureau reiterates that the purpose 

of the special rule is to prevent certain 

short-reset ARMs from obtaining QM 

status if there may be a sharp rise in 

interest rates soon after origination. This 

rise may occur with three-year ARMs, 

which may have contracts that permit 

the interest rate to increase by as much 

as 6 percentage points in the first five 

years. Because consumers may lack 

sufficient time to adjust to larger 

payments early in the loan term or to 

build enough equity to refinance, such 

ARMs pose a higher risk of early 

delinquency. For these additional 

reasons, the Bureau declines to narrow 

coverage to short-reset ARMs with 

initial fixed-rate periods of three years 

or less. 

Some commenters recommended the 

Bureau implement alternative special 

rules to address the risks presented by 

short-reset ARMs. The Bureau declines 

to adopt the alternative special rules 

recommended by these commenters. To 

the extent that commenters are 

advocating for alternative special rules 

to increase the number of short-reset 

ARMs that could obtain QM status, the 

Bureau notes that the increase of the 

rate-spread threshold in the Final Rule 

will expand the pool of QM-eligible 

short-reset ARMs compared to the 

proposal. 

As noted above, a few commenters 

recommended adopting a special rule 

that uses the maximum interest rate in 

the first five years of the loan (as 

opposed to using the APR required by 

the special rule) to compare with the 

AIIR (instead of APOR), plus the 

additional cushion of 2.5 percentage 

points (‘‘AIIR special rule’’). As the 

Bureau understands this 

recommendation, short-reset ARMs 

satisfying the initial test would then be 

subject to the same APR-to-APOR ratespread tests as other loans under the 

General QM loan definition for purposes 

of determining whether the loans 

receive a safe harbor or a rebuttable 

presumption or are non-QM under the 

applicable thresholds. 

The Bureau recognizes that adopting 

this AIIR special rule would expand the 

number of short-reset ARMs that would 

achieve QM status, as interest rate 

increases of up to 2.5 percentage points 

early in the life of the loan would meet 

that special rule’s pricing threshold. The 

Bureau also recognizes that using the 

five-year maximum interest rate in this 

special rule could be a burden-reduction 

measure, since creditors will already 

have calculated that input, as it is 

currently required for underwriting 

loans pursuant to § 1026.43(e)(2)(iv). 

The AIIR special rule would expand 

the pool of QM-eligible short-reset 

ARMs to those whose interest rates 

increase by as much as 2.5 percentage 

points. However, commenters provided 

no evidence that this threshold would 

appropriately identify which loans are 

likely affordable and should receive a 

presumption of compliance. Moreover, 

the Bureau concludes that any potential 

burden-reduction benefits are 

outweighed by the complexity of 

introducing into the General QM loan 

definition a new measure—the AIIR— 

and a new formula that requires, as the 

first step in a two-step process, 

comparing the maximum five-year 

interest rate to the AIIR and then adding 

2.5 percentage points. (Then, if the 

short-reset ARM meets the threshold of 

the first test, it is still subject to the 

price-based APR–APOR rate-spread 

test.) In addition, because ‘‘AIIR’’ is not 

a commonly used term, the Bureau is 

concerned that creditors may not 

understand AIIR to mean what the 

Bureau believes the commenters 

intended, i.e., the mean initial interest 

rate for a particular ARM product. As 

such, a requirement to use the AIIR 

could necessitate significant regulatory 

explanation, likely adding 

implementation and compliance 

burden. Additionally, the AIIR special 

rule would deviate from the final rule’s 

straight-forward APR-to-APOR 

comparison, requiring an additional 

comparison of interest rates. For these 

reasons, the Bureau declines to adopt 

the AIIR special rule. 

Two commenters recommended a 

special rule using the maximum interest 

rate in the first five years for short-reset 

ARMs instead of the APR calculation 

required by the special rule (‘‘five-year 

maximum interest rate special rule’’). 

These commenters advocated this 

alternative special rule as way to 

expand QM eligibility for short-reset 

ARMs and to ease burden, as this 

calculation of the five-year maximum 

interest rate is already required for 

underwriting short-reset ARMs in the 

current ATR/QM Rule 344 and therefore 

would not require an additional 

calculation. One commenter 

recommended setting the General QM 

rate-spread threshold for short-reset 

ARMs in a manner that compares the 

maximum interest rate possible in the 

first five years with a given rate spread 

of APOR. The other commenter 

similarly recommended adopting a 

separate qualification test that compares 

the highest interest rate within five 

years to the APOR plus an appropriate 

threshold. 

The Bureau recognizes that the fiveyear maximum interest rate special rule 

suggested by the commenter would 

expand the pool of QM-eligible shortreset ARMs. However, this would be 

accomplished in part by excluding from 

the APR calculation non-interest finance 

charges, which are included for other 

types of loans subject to the Rule. Such 

finance charges are key components of 

a loan’s pricing and therefore contribute 

to making pricing an effective indicator 

of a consumer’s ability to repay. As 

such, the Bureau declines to exclude 

non-interest finance charges from the 

APR calculation for short-reset ARMs. 

The Bureau further notes that the 

interest-rate-to-APOR comparison 

would allow riskier loans—that is, loans 

that may reset to a significantly higher 

interest rate in the first five years—to 

obtain QM status. As discussed above, 

the intended effect of the Bureau’s 

special rule is to guard against certain 

short-reset ARMs with early, potentially 

unaffordable, sharp increases in interest 

rates from obtaining QM status. For 

these reasons, the Bureau declines to 

adopt the five-year maximum interest 

rate special rule. 

As noted above, a few commenters 

recommended replacing the special rule 

with reasonable secondary interest rate 

caps during the first five years for shortreset ARMs (‘‘rate cap special rule’’). 

While this alternative special rule 

would directly address the threat of 

payment shock, these commenters did 

not specify what rate caps would be 

reasonable or how such caps would 

operate in relation to the contractual 

rate caps under the ARM note. In the 

proposed rule, for these same reasons, 

the Bureau considered and declined to 

propose interest rate caps that 

commenters had suggested in response 

to the ANPR and noted that the special 

rule would address the problem in a 

more streamlined manner. Additionally, 

the rate cap special rule would deviate 

from the pricing approach that would 

apply to other ARMs and fixed-rate 

mortgages subject to this final rule. 

Moreover, commenters provided no 

evidence indicating that rate caps in 

general or that specific rate caps would 

identify more accurately than the 

Bureau’s special rule those short-reset 

ARMs likely to be affordable and thus 

meriting a presumption of compliance. 

The commenters that recommended 

secondary rate caps alternatively 

recommended that the Bureau require 

creditors to use the fully indexed rate 

for the remaining loan term after the 

first five years to calculate the APR for 

short-reset ARMs (without specifying 


KHAMMOND on DSKJM1Z7X2PROD with RULES3
86382 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

345 85 FR 41448 (July 10, 2020). 

346 78 FR 75215 (Dec. 11, 2013) (HUD); 79 FR 

26620 (May 9, 2014) and 83 FR 50506 (Oct. 9, 2018) 

(VA); and 81 FR 26461 (May 3, 2016) (USDA). 

which interest rate to use for the first 

five years). The Bureau understands this 

approach to be similar to the general 

APR requirements for ARMs in 

§ 1026.17(c)(1), which require the 

creditor to disclose a composite APR 

based on the initial rate for as long as 

it is charged and, for the remainder of 

the term, on the fully indexed rate. 

Absent the Bureau’s special rule, this 

would be the applicable APR formula 

for short-reset ARMs under the pricebased approach. Another GSE 

recommended the Bureau adopt that 

GSE’s own requirements for short-reset 

ARMs, which the GSE described as 

using the greater of the fully indexed 

rate or 2 percent over the initial note 

rate for the full term of the loan. 

The Bureau declines to adopt either of 

these approaches. Using the fully 

indexed rate to calculate the APR for 

short-reset ARMs—for some or all of the 

loan term—would not adequately 

address the risk that such ARMs can 

become unaffordable. As noted above, if 

interest rates rise after consummation, 

and therefore the value of the index 

rises to a higher level, the loan can reset 

to a higher interest rate than the fully 

indexed rate at the time of 

consummation. The result would be a 

higher payment than the one that would 

be calculated based on the rates used in 

determining the APR. Requiring the use 

of 2 percent over the initial note rate (if 

greater than the fully indexed rate) also 

would not adequately address this risk. 

As noted above, many short-reset ARMs 

are permitted to adjust substantially 

more than 2 percent early in the life of 

the loan, particularly those structured to 

have multiple adjustments within the 

first five years. The interest rate of such 

ARMs can adjust upward 6 percentage 

points in the first five years of the loan. 

By requiring that the APR for short-reset 

ARMs be determined by treating the 

maximum interest rate during the first 

five years as the interest rate for the full 

term of the loan, the Bureau’s special 

rule is designed to account for that risk, 

and to ensure that General QM status is 

accorded to short-reset ARMs that merit 

a presumption of compliance. 

Legal authority. As discussed above in 

part IV, TILA section 105(a), directs the 

Bureau to prescribe regulations to carry 

out the purposes of TILA, and provides 

that such regulations may contain 

additional requirements, classifications, 

differentiations, or other provisions, and 

may 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. In 

particular, a purpose of TILA section 

129C, as amended by the Dodd-Frank 

Act, is to assure that consumers are 

offered and receive residential mortgage 

loans on terms that reasonably reflect 

their ability to repay the loans. 

As also discussed above in part IV, 

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 

available to consumers in a manner 

consistent with the purposes of section 

129C, necessary and appropriate to 

effectuate the purposes of section 129C 

and section 129B, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance with such section. 

The Bureau is finalizing the special 

rule in § 1026.43(e)(2)(vi) regarding the 

APR determination of certain loans for 

which the interest rate may or will 

change pursuant to its authority under 

TILA section 105(a) to make such 

adjustments and exceptions as are 

necessary and proper to effectuate the 

purposes of TILA, including that 

consumers are offered and receive 

residential mortgage loans on terms that 

reasonably reflect their ability to repay 

the loans. The Bureau concludes that 

these provisions will ensure that 

General QM status would not be 

accorded to short-reset ARMs and 

certain other loans that pose a 

heightened risk of becoming 

unaffordable relatively soon after 

consummation. The Bureau is also 

finalizing these provisions pursuant to 

its authority under TILA section 

129C(b)(3)(B)(i) to revise and add to the 

criteria that define a QM. The Bureau 

believes that the special rule’s APR 

determination provisions in 

§ 1026.43(e)(2)(vi) will ensure that 

responsible, affordable mortgage credit 

remains available to consumers in a 

manner consistent with the purpose of 

TILA section 129C, referenced above, as 

well as effectuate that purpose. 

43(e)(4) 

TILA section 129C(b)(3)(B)(ii) directs 

HUD, VA, USDA, and RHS to prescribe 

rules defining the types of loans they 

insure, guarantee, or administer, as the 

case may be, that are QMs. Pending the 

other agencies’ implementation of this 

provision, the Bureau included in the 

ATR/QM Rule a temporary category of 

QMs in the special rules in 

§ 1026.43(e)(4)(ii)(B) through (E) 

consisting of mortgages eligible to be 

insured or guaranteed (as applicable) by 

HUD, VA, USDA, and RHS. The Bureau 

also created the Temporary GSE QM 

loan definition in § 1026.43(e)(4)(ii)(A). 

Section 1026.43(e)(4)(i) currently 

states that, notwithstanding 

§ 1026.43(e)(2), a QM is a covered 

transaction that satisfies the 

requirements of § 1026.43(e)(2)(i) 

through (iii)—the General QM loanfeature prohibitions and points-and-fees 

limits—as well as one or more of the 

criteria in § 1026.43(e)(4)(ii). Section 

1026.43(e)(4)(ii) currently states that a 

QM under § 1026.43(e)(4) must be a loan 

that is eligible under enumerated 

‘‘special rules’’ to be (A) purchased or 

guaranteed by the GSEs while under the 

conservatorship of the FHFA (the 

Temporary GSE QM loan definition), (B) 

insured by HUD under the National 

Housing Act, (C) guaranteed by VA, (D) 

guaranteed by USDA pursuant to 42 

U.S.C. 1472(h), or (E) insured by RHS. 

Section 1026.43(e)(4)(iii)(A) currently 

states that § 1026.43(e)(4)(ii)(B) through 

(E) shall expire on the effective date of 

a rule issued by each respective agency 

pursuant to its authority under TILA 

section 129C(b)(3)(ii) to define a QM. 

Section 1026.43(e)(4)(iii)(B) currently 

states that, unless otherwise expired 

under § 1026.43(e)(4)(iii)(A), the special 

rules in § 1026.43(e)(4) are available 

only for covered transactions 

consummated on or before January 10, 

2021. 

In the General QM Proposal, the 

Bureau proposed to replace current 

§ 1026.43(e)(4) with a provision stating 

that, notwithstanding § 1026.43(e)(2), a 

QM is a covered transaction that is 

defined as a QM by HUD under 24 CFR 

201.7 or 24 CFR 203.19, VA under 38 

CFR 36.4300 or 38 CFR 36.4500, or 

USDA under 7 CFR 3555.109. The 

Bureau proposed these amendments 

because, in the Extension Proposal, the 

Bureau proposed to revise 

§ 1026.43(e)(4)(iii)(B) to state that, 

unless otherwise expired under 

§ 1026.43(e)(4)(iii)(A), the special rules 

in § 1026.43(e)(4) would be available 

only for covered transactions 

consummated on or before the effective 

date of a final rule issued by the Bureau 

amending the General QM loan 

definition.345 In the General QM 

Proposal, the Bureau also noted that, 

after the promulgation of the January 

2013 Final Rule, each of the agencies 

described in § 1026.43(e)(4)(ii)(B) 

through (E) adopted separate definitions 

of qualified mortgages.346 The Bureau 

noted that, as a result, the special rules 

in § 1026.43(e)(4)(ii)(B) through (E) are 


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347 85 FR 67938 (Oct. 26, 2020). 

already superseded by the actions of 

HUD, VA, and USDA. The Bureau’s 

proposed amendments to § 1026.43(e)(4) 

provided cross-references to each of 

these other agencies’ definitions so that 

creditors and practitioners have a single 

point of reference for all QM definitions. 

The Bureau proposed to amend 

comment 43(e)(4)–1 to reflect the crossreferences to the QM definitions of other 

agencies and to clarify that a covered 

transaction that meets another agency’s 

definition is a QM for purposes of 

§ 1026.43(e). The Bureau proposed to 

amend Comment 43(e)(4)–2 to clarify 

that covered transactions that met the 

requirements of § 1026.43(e)(2)(i) 

through (iii), were eligible for purchase 

or guarantee by Fannie Mae or Freddie 

Mac, and were consummated prior to 

the effective date of any final rule 

promulgated as a result of the proposal 

would still be considered a QM for 

purposes of § 1026.43(e) after the 

adoption of such potential final rule. 

Comments 43(e)(4)–3, –4, and –5 would 

have been removed. The Bureau 

requested comment on the proposed 

amendments to § 1026.43(e)(4) and 

related commentary. Comments on the 

proposal did not discuss the proposed 

amendments to § 1026.43(e)(4) and its 

related commentary. 

In this final rule, the Bureau amends 

§ 1026.43(e)(4) as proposed, with 

modifications to the commentary to 

clarify the application of this final rule’s 

effective date to the availability of the 

Temporary GSE QM loan definition. 

As noted above, on October 20, 2020, 

the Bureau issued the Extension Final 

Rule to replace the January 10, 2021 

sunset date of the Temporary GSE QM 

loan definition with a provision stating 

that the Temporary GSE QM loan 

definition will be available only for 

covered transactions for which the 

creditor receives the consumer’s 

application before the mandatory 

compliance date of this final rule.347 As 

noted in part VII below, this final rule 

will have an effective date of March 1, 

2021, and a mandatory compliance date 

of July 1, 2021. As a result, the 

Temporary GSE QM loan definition will 

still be used by creditors after the 

effective date of March 1, 2021 and will 

not expire until July 1, 2021. In this 

final rule, the Bureau is making changes 

to proposed comment 43(e)(4)–2 to 

reflect this final rule’s effective date and 

mandatory compliance date. 

As noted above, the Bureau proposed 

to remove 43(e)(4)–3. In this final rule, 

the Bureau is instead revising comment 

43(e)(4)–3 to cross-reference new 

comment 43–2. As discussed further in 

part VII below, new comment 43–2 

clarifies that, for transactions for which 

a creditor received an application on or 

after March 1, 2021, but prior to July 1, 

2021, a creditor has the option of 

complying either with 12 CFR part 1026 

as it is in effect or with 12 CFR part 

1026 as it was in effect on February 26, 

2021. The Bureau believes this comment 

will assist creditors and secondary 

market participants with compliance 

with the final rule because it will clarify 

that, even though the Temporary GSE 

QM loan definition will not appear in 

§ 1026.43(e)(4) after this final rule’s 

effective date of March 1, 2021, 

creditors may continue to use it for 

transactions for which they received the 

consumer’s application prior to July 1, 

2021. 

The Bureau is amending 

§ 1026.43(e)(4) and related commentary 

pursuant to TILA section 

129C(b)(3)(B)(ii), since the respective 

agencies directed to create their own 

definitions of qualified mortgages have 

done so and the Temporary GSE patch 

provisions will cease to be applicable on 

July 1, 2021. 

Conforming Changes 

As discussed above, the Bureau 

proposed, among other things, to revise 

the requirements in § 1026.43(e)(2)(v) 

that creditors consider and verify 

certain information; to remove the DTI 

limit in § 1026.43(e)(2)(vi); to remove 

references to appendix Q from 

§ 1026.43; and to remove appendix Q 

from Regulation Z entirely. Accordingly, 

the Bureau proposed non-substantive 

conforming changes in certain 

provisions to reflect these proposed 

changes. 

Specifically, the Bureau proposed to 

update comment 43(c)(7)–1 by removing 

the reference to the DTI limit in 

§ 1026.43(e). The Bureau also proposed 

conforming changes to provisions 

related to small creditor QMs in 

§ 1026.43(e)(5)(i) and to balloonpayment QMs in § 1026.43(f)(1). Both 

§ 1026.43(e)(5) and (f)(1) currently 

provide that as part of the respective 

QM definitions, loans must comply with 

the requirements in existing 

§ 1026.43(e)(2)(v) to consider and verify 

certain information. As discussed above, 

the Bureau proposed to reorganize and 

revise § 1026.43(e)(2)(v) in order to 

provide that creditors must consider 

DTI or residual income and to clarify 

the requirements for creditors to 

consider and verify income or assets, 

debts, and other information. The 

proposed conforming changes to 

§ 1026.43(e)(5) and (f)(1) would 

generally have inserted the substantive 

requirements of existing 

§ 1026.43(e)(2)(v) into § 1026.43(e)(5)(i) 

and (f)(1), respectively, and would have 

provided that loans under 

§ 1026.43(e)(5) and (f) do not have to 

comply with revised § 1026.43(e)(2)(v) 

or (vi). However, the proposed 

conforming changes would not have 

inserted the requirement that creditors 

consider and verify income or assets, 

debts, and other information in 

accordance with appendix Q because 

the Bureau proposed to remove 

appendix Q from Regulation Z. The 

Bureau also proposed conforming 

changes to the related commentary. 

The Bureau did not receive any 

comments on the proposed conforming 

changes. While the Bureau, in this final 

rule, is making some modifications to 

the proposal, none of these 

modifications affects the proposed 

conforming changes. Therefore, this 

final rule adopts the conforming 

changes to comment 43(c)(7)–1 and to 

the provisions related to small creditor 

QMs in § 1026.43(e)(5)(i) and balloonpayment QMs in § 1026.43(f)(1) as 

proposed. 

Appendix Q to Part 1026—Standards 

for Determining Monthly Debt and 

Income 

Appendix Q to part 1026 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. As explained in the 

section-by-section analysis of 

§ 1026.43(e)(2)(v)(B) above, the Bureau 

proposed to remove appendix Q from 

Regulation Z entirely in light of 

concerns from creditors and investors 

that its rigidity, ambiguity, and static 

nature result in standards that are both 

confusing and outdated. The Bureau 

sought comment on whether, instead of 

removing appendix Q entirely, it should 

retain appendix Q as an option for 

complying with the ATR/QM Rule’s 

verification requirements. 

Commenters generally supported 

removing appendix Q. Commenters 

stated that appendix Q’s requirements to 

consider and verify income and debt are 

outdated, ambiguous, and inflexible. 

Commenters also stated that appendix Q 

is difficult for creditors to use for selfemployed and gig economy consumers 

and in some cases has resulted in 

reduced access to credit. A consumer 

advocate, for example, stated that 

appendix Q consisted of ‘‘ossified and 

complex detail’’ and supported the 

Bureau’s proposal to amend 

§ 1026.43(e)(2)(v). These commenters 

generally supported replacing appendix 

Q with the provisions of 

§ 1026.43(e)(2)(v) discussed above. In 


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348 85 FR 41448, 41752 (July 10, 2020). 

349See Assessment Report, supra note 63, at 11. 

350See id. at 155. 

351The Bureau’s use of the term ‘‘mandatory 

compliance date’’ does not imply that creditors are 

required to use the General QM loan definition to 

comply with the ATR/QM Rule’s ability-to-repay 

requirements. Unless a loan is eligible for QM 

status—such as under § 1026.43(e)(2), 

§ 1026.43(e)(5), or § 1026.43(f)—a creditor must 

make a reasonable and good faith determination of 

the consumer’s ability to repay and does not receive 

a presumption of compliance. 

352This final rule uses the term ‘‘implementation 

period’’ to refer to the period between the date the 

Bureau issues this final rule and the date that 

creditors seeking to originate General QMs must 

comply with the General QM loan definition as 

amended by this final rule. Under the General QM 

Proposal, this implementation period would have 

ended on the effective date, while under this final 

rule the implementation period will end on the 

mandatory compliance date. 

contrast, two industry commenters 

supported retaining appendix Q and 

suggested detailed edits to its 

provisions. However, both comment 

letters discussed such edits to appendix 

Q in the context of retaining a DTI limit 

within the General QM loan definition, 

which is not being adopted for the 

reasons discussed in part V above. 

This final rule removes the appendix 

Q requirements from § 1026.43(e)(2)(v) 

and removes appendix Q from 

Regulation Z entirely, as the Bureau 

proposed. The Bureau determines that, 

due to the well-founded and consistent 

concerns articulated by stakeholders 

and described in detail in the General 

QM Proposal,348 appendix Q does not 

provide sufficient compliance certainty 

to creditors and does not provide 

flexibility to adapt to emerging issues 

with respect to the treatment of certain 

types of debt or income categories. The 

Bureau does not anticipate that 

removing appendix Q and using the 

new requirements of 1026.43(e)(2)(v) to 

consider and verify income, assets, 

debts, alimony, and child support will 

lead to higher risk loans obtaining QM 

status beyond loans that will receive 

such status from the removal of DTI 

limits as discussed in part C.4 above. 

The Bureau recognizes that some 

findings in the Assessment Report 

suggest that the issues raised by 

creditors with respect to appendix Q do 

not appear to have had a substantial 

impact for certain loans. For example, 

although creditors have stated that it 

may be difficult to comply with certain 

appendix Q requirements for selfemployed borrowers, the Assessment 

Report noted that application data 

indicated that the approval rates for 

non-high DTI, non-GSE eligible selfemployed borrowers have decreased by 

only 2 percentage points since the 

January 2013 Final Rule became 

effective.349 The Bureau concludes, 

however, that this limited decrease in 

approvals for such applications does not 

undermine creditors’ concerns that 

appendix Q’s definitions of debt and 

income are rigid and difficult to apply 

and do not provide the level of 

compliance certainty that the Bureau 

anticipated in the January 2013 Final 

Rule. Additionally, the Assessment 

Report showed that about 40 percent of 

respondents to a lender survey 

indicated that they ‘‘often’’ or 

‘‘sometimes’’ originate non-QM loans if 

the borrower cannot provide 

documentation required by appendix Q. 

The Bureau concluded in the 

Assessment Report that these results left 

open the possibility that appendix Q 

requirements may have had an impact 

on access to credit.350

The Bureau declines to retain and 

revise appendix Q. As noted above, the 

Bureau concludes that appendix Q is 

inflexible, ambiguous and static, which 

results in standards that are both 

confusing and outdated. The Bureau 

concludes that it would be time- and 

resource-intensive to revise appendix Q 

in a manner to try to resolve these 

concerns. The Bureau therefore 

concludes that removing appendix Q 

entirely would be more efficient and 

practicable than retaining and revising 

it. The Bureau also does not anticipate 

a decrease in consumer protection as a 

result of removing appendix Q and 

adopting the provisions of 

1026.43(e)(2)(v). 

VII. Effective Date 

A. The Bureau’s Proposal 

The Bureau proposed an effective date 

for a revised General QM loan definition 

of six months after publication in the 

Federal Register of a final rule. The 

Bureau further proposed that the revised 

regulations would apply to covered 

transactions for which creditors receive 

an application on or after that effective 

date. In the proposal, the Bureau 

tentatively determined that a six-month 

period between Federal Register 

publication of a final rule and the final 

rule’s effective date would give creditors 

enough time to bring their systems into 

compliance with the revised 

regulations. The Bureau also stated it 

did not intend to issue a final rule 

amending the General QM loan 

definition early enough for it to take 

effect before April 1, 2021. 

For the reasons described below, this 

final rule adopts an effective date of 

March 1, 2021, and a mandatory 

compliance date of July 1, 2021, 

resulting in an optional early 

compliance period between March 1, 

2021 and July 1, 2021.351 This final rule 

adds new comment 43–2, which 

explains that, for transactions for which 

a creditor received the consumer’s 

application on or after March 1, 2021 

and prior to July 1, 2021, creditors have 

the option of using either the current 

General QM loan definition (i.e., the 

version in effect on February 26, 2021) 

or the revised General QM loan 

definition. Comment 43–2 also explains 

that, for transactions for which a 

creditor received the consumer’s 

application on or after July 1, 2021, 

creditors seeking to originate General 

QMs are required to use the revised 

General QM loan definition. Comment 

43–2 also specifies the meaning of 

‘‘application’’ for these purposes. 

B. Comments Received 

The Bureau received several 

comments concerning the effective date 

and implementation period.352 Several 

industry commenters supported the 

proposal to link the effective date to the 

date the creditor received the 

consumer’s application. One of these 

commenters stated that using the 

application date is preferable to using 

the consummation date because, while 

a loan is being processed and 

underwritten, the consummation date 

remains unknown, making it difficult 

for the creditor to anticipate which 

General QM loan definition to apply. 

Another commenter recommended 

clarifying that ‘‘application’’ has the 

same definition as under the Bureau’s 

TILA–RESPA Integrated Disclosure Rule 

(TRID) because that definition is 

commonly used by the secondary 

market. 

As discussed below, this final rule 

adds new comment 43–2 to clarify the 

operation of the final rule’s effective 

date and mandatory compliance date, 

including clarifying that the effective 

date and mandatory compliance date are 

linked to the date the creditor received 

the consumer’s application. Comment 

43–2 also clarifies that, for transactions 

subject to TRID, creditors determine the 

date the creditor received the 

consumer’s application, for purposes of 

this final rule’s effective date and 

mandatory compliance date, in 

accordance with the TRID definition of 

application in § 1026.2(a)(3)(ii). This 

new comment 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 this final 

rule’s effective date and mandatory 

compliance date, in accordance with 

either § 1026.2(a)(3)(i) or (ii). The 

Bureau concludes that the clarifications 


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353The Bureau has separately proposed to amend 

Regulation Z to facilitate creditors’ transition away 

from using LIBOR as an index for variable-rate 

consumer credit products. 85 FR 36938 (June 18, 

2020). 

354See Fannie Mae & Freddie Mac, Extended 

URLA Implementation Timeline (Apr. 14, 2020), 

https://singlefamily.fanniemae.com/media/22661/ 

display. 355 85 FR 67938, 67951 (Oct. 26, 2020). 

provided in comment 43–2 will reduce 

uncertainty throughout the origination 

process. 

Several industry commenters 

addressed the length of the 

implementation period. One industry 

commenter supported the Bureau’s 

proposed effective date of six months 

after the final rule’s publication in the 

Federal Register. Another industry 

commenter requested an 

implementation period extending to 

June 2021 and a 90-day grace period 

during which loans would still be 

reviewed for compliance with the 

revised definition but the Bureau would 

take no action to penalize simple 

mistakes and interpretation differences. 

The commenter stated that it took many 

months for small-to-mid-size creditors 

and investor channels to adjust to TRID. 

Several industry commenters stated 

that an implementation period longer 

than six months is needed for creditors 

to work with vendors to develop and 

install software updates, conduct 

testing, update training policies, 

complete staff training, and educate 

consumers on product offerings. These 

commenters’ recommendations for the 

length of the implementation period 

ranged from 12 months to 24 months. 

One of these industry commenters did 

not recommend a specific timeframe but 

stated that implementation would, on 

average, take from six months to 12 

months depending on the size and 

complexity of both the vendor and 

creditor—or even up to 18 months 

depending on the overall complexity of 

the final rule, the timing of its effective 

date, and its impact on key operations 

such as underwriting. Another of these 

industry commenters requested at least 

one year for implementation while also 

stating that: Many creditors needed 

more than a year to implement the 

January 2013 Final Rule; a longer 

implementation period might avoid 

wasted time and expense if the 

regulation is changed again as a result 

of the 2020 elections; and small-to-midsize creditors need more 

implementation time than larger 

creditors. Several industry 

commenters—including the commenter 

that generally supported the proposed 

effective date—stated that, in particular, 

the APR calculation for certain ARMs 

under proposed § 1026.43(e)(2)(vi) 

would require a significant (but 

unspecified) amount of implementation 

time. 

As noted above, this final rule adopts 

a mandatory compliance date of July 1, 

2021. This date is approximately six 

months after the date the Bureau 

expects this final rule to be published in 

the Federal Register. Therefore, this 

final rule adopts an implementation 

period similar to the six-month 

implementation period the Bureau 

proposed. The Bureau declines to adopt 

a longer implementation period because 

the Bureau concludes that a six-month 

period gives creditors and the secondary 

market enough time to prepare to 

comply with the amendments in this 

final rule. For example, with respect to 

the price-based thresholds in revised 

§ 1026.43(e)(2)(vi), the Bureau 

understands that creditors currently 

calculate the APR and APOR for 

mortgage loans. With respect to the 

consider and verify requirements in 

revised § 1026.43(e)(2)(v), the Bureau 

understands that the revised consider 

requirements generally reflect existing 

market practices and that creditors 

currently use and are familiar with the 

verification standards in the verification 

safe harbor. The Bureau also concludes 

that this final rule is less complex to 

implement relative to other rules the 

Bureau has issued, such as the January 

2013 Final Rule or TRID. The Bureau 

further concludes that it would be 

imprudent to provide a longer than 

necessary implementation period based 

on mere speculation that the Bureau 

might propose additional changes in the 

future. The Bureau declines to adopt a 

90-day grace period or allow more 

implementation time for small-to-midsize creditors because the Bureau 

concludes, for the reasons described 

above, that a six-month period gives all 

creditors and secondary market 

participants enough time to prepare to 

comply with the amendments in this 

final rule. The Bureau also concludes 

that establishing an optional early 

compliance period will facilitate 

implementation for all creditors, 

including small-to-mid-size creditors, 

for the reasons described below in the 

discussion of the final rule. 

Several industry commenters also 

stated that this final rule’s 

implementation period should generally 

account for other simultaneous 

challenges for creditors, including 

responding to the COVID–19 pandemic 

and its economic effects; transitioning 

indices away from LIBOR; 353 and 

implementing the GSEs’ redesigned 

Uniform Residential Loan Application 

(URLA).354 One of those commenters 

specified that this final rule’s 

implementation period should extend at 

least six months after the URLA’s March 

2021 mandatory compliance date. The 

Bureau concludes that a six-month 

implementation period gives creditors 

and secondary market participants 

enough time to prepare for the 

amendments in this final rule, even in 

light of these other commitments. As 

stated above, the Bureau concludes that 

this final rule is less complex to 

implement relative to other rules, such 

as the January 2013 Final Rule or TRID, 

and will not require significant changes 

to creditors’ existing practices. 

Moreover, the Bureau concludes that 

current market conditions do not 

require a longer implementation period. 

Several industry commenters 

responded to the General QM Proposal 

by requesting that the Bureau establish 

a period during which the Temporary 

GSE QM loan definition would remain 

in effect after the date creditors are 

required to transition from the current 

General QM loan definition to the 

revised General QM loan definition 

(Overlap Period). With respect to the 

length of the Overlap Period, 

commenters suggested periods between 

six months and one year. The Bureau 

also received several requests for an 

Overlap Period in response to the 

Extension Proposal, with commenters 

suggesting that the period last between 

four months and one year. The Bureau 

declines to adopt an Overlap Period in 

this final rule for the same reasons it 

declined to adopt an Overlap Period in 

the Extension Final Rule. In that final 

rule, the Bureau concluded that 

establishing an Overlap Period would 

keep the Temporary GSE QM loan 

definition in place longer than 

necessary to facilitate a smooth and 

orderly transition to a revised General 

QM loan definition and would prolong 

the negative effects of the Temporary 

GSE QM loan definition on the mortgage 

market.355

In contrast with an Overlap Period, 

one group of industry commenters 

requested an optional early compliance 

period during which the revised General 

QM loan definition would become 

available, on an optional basis, before 

the date creditors are required to 

transition from the current General QM 

loan definition to the revised General 

QM loan definition. The group did not 

specify how much earlier, in its view, 

the Bureau should make the revised 

General QM loan definition available. 

As discussed below, the Bureau 

concludes that establishing an optional 

early compliance period will facilitate a 

smooth and orderly transition to a 


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86386 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

356The Bureau’s use of the term ‘‘mandatory 

compliance date’’ does not imply that creditors are 

required to use the General QM loan definition to 

comply with the ATR/QM Rule’s ability-to-repay 

requirements. Unless a loan is eligible for QM 

status—such as under § 1026.43(e)(2), 

§ 1026.43(e)(5) or § 1026.43(f)—a creditor must 

make a reasonable and good faith determination of 

the consumer’s ability to repay and does not receive 

a presumption of compliance. 

357 In that case, pursuant to the conservatorship 

clause, the Temporary GSE QM loan definition 

would expire with respect to that GSE on the date 

that GSE ceases to operate under conservatorship. 

358The Seasoned QM Final Rule, which the 

Bureau is releasing simultaneously with this final 

rule, has an effective date of 60 days after 

publication of the final rule in the Federal Register. 

Unlike this final rule, there is no optional early 

compliance period for the Seasoned QM Final Rule. 

359 In the Extension Proposal, which the Bureau 

released concurrently with the General QM 

Proposal, the Bureau proposed to extend the 

Temporary GSE QM loan definition until the 

effective date of a final rule amending the General 

QM loan definition. See supra part III.C. Thus, 

when the Bureau issued the General QM Proposal, 

it expected that the Temporary GSE QM loan 

definition would expire on the effective date of this 

final rule, along with the current General QM loan 

definition (unless one or both of the GSEs were to 

cease to operate under conservatorship prior to the 

effective date). However, the Extension Final Rule 

extended the Temporary GSE QM loan definition 

until the mandatory compliance date, not the 

effective date, of a final rule amending the General 

QM loan definition. As a result, the Temporary GSE 

QM loan definition will be available until the 

mandatory compliance date of this final rule (July 

1, 2021), unless one or both of the GSEs cease to 

operate under conservatorship prior to July 1, 2021. 

See supra part III.D. 

revised General QM loan definition 

without prolonging the negative effects 

of the Temporary GSE QM loan 

definition. 

C. The Final Rule 

For the reasons discussed below (and 

above in response to commenters), this 

final rule adopts an effective date of 

March 1, 2021, and a mandatory 

compliance date of July 1, 2021, 

resulting in an optional early 

compliance period between March 1, 

2021 and July 1, 2021.356 This final rule 

adds new comment 43–2, which 

explains that, for transactions for which 

a creditor received the consumer’s 

application on or after March 1, 2021, 

and prior to July 1, 2021, creditors 

seeking to originate General QMs have 

the option of complying with either the 

current General QM loan definition (i.e., 

the version in effect on February 26, 

2021) or the revised General QM loan 

definition. This comment also explains 

that, for transactions for which a 

creditor received the consumer’s 

application on or after July 1, 2021, 

creditors seeking to originate General 

QMs must use the revised General QM 

loan definition. Comment 43–2 also 

specifies the meaning of ‘‘application’’ 

for these purposes. 

The Bureau also notes that the 

Temporary GSE QM loan definition will 

be available for transactions for which 

the creditor receives the consumer’s 

application before July 1, 2021, unless 

the applicable GSEs ceases to operate 

under conservatorship before July 1, 

2021.357 As noted above, the Extension 

Final Rule amended Regulation Z to 

replace the January 10, 2021 sunset date 

of the Temporary GSE QM loan 

definition with a provision stating that 

the Temporary GSE QM loan definition 

will be available only for covered 

transactions for which the creditor 

receives the consumer’s application 

before the mandatory compliance date 

of final amendments to the General QM 

loan definition in Regulation Z. Under 

this final rule, which amends the 

General QM loan definition, that 

mandatory compliance date is July 1, 

2021. The Extension Final Rule did not 

amend the conservatorship clause in 

§ 1026.43(e)(4)(ii)(A). As a result, the 

Temporary GSE QM loan definition will 

be available for transactions for which 

the creditor receives the consumer’s 

application before July 1, 2021, unless 

the applicable GSE ceases to operate 

under conservatorship before July 1, 

2021. 

Consistent with the practice of other 

agencies in similar contexts, the revised 

General QM loan definition will be 

incorporated into the Code of Federal 

Regulations on the March 1, 2021 

effective date. Comment 43–2 clarifies 

that for transactions for which the 

creditor receives the application on or 

after March 1, 2021, but prior to July 1, 

2021, the creditor has the option of 

complying either with Regulation Z (as 

interpreted by the commentary) as it is 

in effect (including the amendments set 

forth in this final rule) or as it was in 

effect on February 26, 2021, together 

with any amendments that become 

effective other than the amendments set 

forth in this final rule.358 The Bureau 

concludes that this final rule will 

reduce uncertainty throughout the 

origination process by linking the 

effective date and mandatory 

compliance date to the date the creditor 

received the consumer’s application. 

The applicability of this final rule’s 

effective date and mandatory 

compliance date, as well as compliance 

with this final rule’s revisions to 

Regulation Z, is determined on a loanby-loan basis. For example, if a creditor 

receives an application for a given loan 

on March 1, 2021 March 1, 2021, and 

that loan satisfies the current General 

QM loan definition (including satisfying 

the 43 percent DTI limit), then the loan 

is eligible for General QM status—even 

if the loan does not satisfy the revised 

General QM loan definition (e.g., 

exceeds the applicable 

§ 1026.43(e)(2)(vi) pricing threshold). 

Similarly, if a creditor receives an 

application for a different loan on 

March 1, 2021, and that loan satisfies 

the revised General QM loan definition 

(including satisfying the applicable 

§ 1026.43(e)(2)(vi) pricing threshold), 

then the loan is eligible for General QM 

status—even if the loan does not satisfy 

the current General QM loan definition 

(e.g., exceeds the 43 percent DTI limit). 

As discussed above, the Bureau 

concludes that a mandatory compliance 

date of July 1, 2021, will provide 

stakeholders with a sufficient amount of 

time—approximately six months—to 

prepare to implement the revised 

General QM loan definition. While the 

Bureau proposed an effective date that 

would vary based on the date of 

publication in the Federal Register, the 

Bureau concludes that using a date 

certain for the mandatory compliance 

date (July 1, 2021) will facilitate 

implementation of this final rule by 

allowing stakeholders to begin 

preparing to implement by a particular 

date (i.e., no later than July 1, 2021) as 

soon as the Bureau issues this final rule, 

rather than when the Federal Register 

publishes the final rule some days later. 

The Bureau has decided to adopt an 

optional early compliance period 

starting on March 1, 2021 (i.e., to allow 

creditors to begin using the revised 

General QM loan definition for 

applications received on or after the 

March 1, 2021 effective date). In the 

General QM Proposal, the Bureau stated 

that it did not intend to issue a final rule 

early enough for it to take effect before 

April 1, 2021. With this statement, the 

Bureau sought to reassure creditors and 

other market participants that creditors 

seeking to originate General QMs would 

not be required to discontinue using the 

existing General QM loan definition or 

to implement the revised General QM 

loan definition before April 1, 2021.359

In the proposal, the Bureau expected 

that this would occur on the final rule’s 

effective date, because the proposal did 

not provide for an optional early 

compliance period with a separate 

mandatory compliance date. In contrast, 

under this final rule, creditors may 

continue using the existing General QM 

loan definition or wait to implement the 

revised General QM loan definition, 

should they wish to do so, until the 

rule’s mandatory compliance date, 

which is July 1, 2021. This mandatory 

compliance date of July 1, 2021 is 

consistent with the Bureau’s 

expectation, at the proposal stage, that 


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360 85 FR 67938, 67952 (Oct. 26, 2020). 

361The ATR/QM Rule generally applies to closedend consumer credit transactions that are secured 

by a dwelling, as defined in 12 CFR 1026.2(a)(19), 

including any real property attached to a dwelling. 

12 CFR 1026.43(a). Therefore, the Rule applies to 

a dwelling, as defined in § 1026.19(a), whether or 

not it is attached to real property. In contrast, TRID 

generally applies to closed-end consumer credit 

transactions secured by real property or a 

cooperative unit. 12 CFR 1026.19(e)(1)(i). Therefore, 

some transactions that are a secured by a dwelling 

that is not considered real property under State or 

other applicable law will be subject to the ATR/QM 

Rule but not TRID. 

362HMDA 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., 

Mortgage data (HMDA), https://

www.consumerfinance.gov/data-research/hmda/. 

363The 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.) 

creditors seeking to originate General 

QMs would not be required to 

implement the revised General QM loan 

definition before April 1, 2021 (as 

creditors have the option of waiting 

until July 1, 2021). 

The Bureau further concludes that the 

flexibility afforded under the optional 

early compliance period may help 

creditors implement the provisions of 

the final rule more quickly and easily. 

To the extent that large creditors are 

more likely to avail themselves of 

optional early compliance, the Bureau 

notes that small-to-mid-size 

correspondent lenders will also benefit, 

as they often wait for larger wholesale 

creditors to implement a rule before 

finalizing their own implementation 

strategy to ensure their systems are 

compatible with the wholesale 

creditors. 

New comment 43–2 clarifies that, for 

transactions subject to TRID, creditors 

determine the date the creditor received 

the consumer’s application, for 

purposes of this comment, in 

accordance with the TRID definition of 

application in § 1026.2(a)(3)(ii). This 

new comment 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 this 

comment, in accordance with either 

§ 1026.2(a)(3)(i) or (ii). 

As discussed in the Extension Final 

Rule,360 Regulation Z contains two 

definitions of ‘‘application.’’ Section 

1026.2(a)(3)(i) defines ‘‘application’’ as 

the submission of a consumer’s 

financial information for the purposes of 

obtaining an extension of credit. This 

definition applies to all transactions 

covered by Regulation Z. Section 

1026.2(a)(3)(ii) also contains a more 

specific definition of ‘‘application.’’ 

Under this definition, for transactions 

subject to § 1026.19(e), (f), or (g)—i.e., 

transactions subject to TRID—an 

application consists of the submission 

of the consumer’s name, the consumer’s 

income, the consumer’s social security 

number to obtain a credit report, the 

property address, an estimate of the 

value of the property, and the mortgage 

loan amount sought. The more specific 

definition of application in 

§ 1026.2(a)(3)(ii) applies not just for 

purposes of TRID, but extends to all 

transactions subject to TRID. Therefore, 

for transactions that are subject to the 

ATR/QM Rule and that are also subject 

to TRID, the Bureau concludes that the 

more specific definition applies for 

purposes of the ATR/QM Rule as well. 

However, for transactions that are 

subject to the ATR/QM Rule but that are 

not subject to TRID, the Bureau finds 

that there may be ambiguity as to when 

the creditor received the consumer’s 

application for purposes of the effective 

date of the revised General QM loan 

definition, optional compliance 

provision, and mandatory compliance 

date.361 This potential ambiguity arises 

because the general definition of 

application in § 1026.2(a)(3)(i) is less 

precise than the TRID definition. 

To address this potential ambiguity, 

new comment 43–2 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 this 

comment, in accordance with either 

§ 1026.2(a)(3)(i) or (ii). The Bureau 

concludes that this clarification is 

appropriate because it will facilitate 

compliance with this final rule by 

reducing uncertainty throughout the 

origination process. 

VIII. Dodd-Frank Act Section 1022(b) 

Analysis 

A. Overview 

As discussed above, this final rule 

amends the General QM loan definition 

to, among other things, remove the 

specific DTI limit and add pricing 

thresholds. 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 DoddFrank 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. 

1. Data and Evidence 

The discussion in these impact 

analyses relies on data from a range of 

sources. These include data collected or 

developed by the Bureau, including 

HMDA 362 and NMDB363 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 DoddFrank Act. The Assessment Report 

provides quantitative and qualitative 

information on questions relevant to 

this final rule, including the extent to 

which DTI ratios are probative of a 

consumer’s ability to repay, the effect of 

rebuttable presumption status relative to 

safe harbor status on access to credit, 

and the effect of QM status relative to 

non-QM status on access to credit. 

Consultations with other regulatory 

agencies, industry, and research 

organizations inform the Bureau’s 

impact analyses. 

The data the Bureau relied upon 

provided detailed information on the 

number, characteristics, pricing, and 

performance of mortgage loans 

originated in recent years. As discussed 

above, commenters provided some 

supplemental data and estimates with 

more information relevant to pricing 

and APR calculations (particularly PMI 

costs) for originations before 2018. PMI 

costs are an important component of 

APRs, particularly for loans with 

smaller down payments, and thus 

should be included or estimated in 

calculations of rate spreads relative to 

APOR. The data provided by 

commenters show a strong positive 


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364The Assessment Report, the ANPR, the 

Extension Proposal, the General QM Proposal, and 

the Extension Final Rule used the term ‘‘High-DTI 

loans’’ to refer to loans with DTI ratios over 43 

percent. For greater precision and because this final 

rule is eliminating the 43 percent DTI limit, this 

final rule instead uses the term ‘‘Over-43-PercentDTI loans’’ to refer to such loans. 

365 84 FR 37155, 37158–59 (July 31, 2019). 

366 Id. at 37158–59. 

367 Id. at 37159. 

368 Id. The Bureau estimates that 616,000 of these 

loans were for home purchases, and 341,000 were 

refinance loans. In addition, the Bureau estimates 

that the share of these loans with DTI ratios over 

45 percent has varied over time due to changes in 

market conditions and GSE underwriting standards, 

rising from 47 percent in 2016 to 56 percent in 

2017, and further to 69 percent in 2018. 

369 Id. at 37159. 

370 Id. at 37159 n.58. Where these types of loans 

have DTI ratios above 43 percent, they would be 

captured in the estimate above relating to Over-43- 

Percent-DTI GSE loans. 

relationship between rate spread over 

APOR and delinquency rates, similar to 

the relationship shown in the Bureau’s 

analyses of 2002–2008 data and 2018 

data. 

The data do not provide information 

on creditor costs. As a result, analyses 

of any impacts of this final rule on 

creditor costs, particularly realized costs 

of implementing underwriting criteria 

or potential costs from legal liability, are 

based on more qualitative information. 

Similarly, estimates of any changes in 

burden on consumers resulting from 

increased or decreased verification 

requirements are based on qualitative 

information. 

Finally, a group of consumer advocate 

commenters submitted a joint letter 

arguing that because the mortgage 

finance market is in flux, any 

assumptions made regarding the impact 

of pricing as an adequate substitute for 

more direct measures of ability to repay 

are rendered uncertain by the current 

economic conditions, and thus the 

Bureau should refrain from revising the 

General QM definition. In the proposal, 

the Bureau acknowledged the 

importance of economic disruptions and 

mortgage market changes due to the 

COVID–19 pandemic. However, the 

Bureau did not receive data or evidence 

from commenters that would lead it to 

anticipate that market changes or other 

circumstances will significantly alter its 

estimates of the benefits and costs of 

this final rule. These commenters also 

stated that the Bureau must fulfill its 

statutory obligation ‘‘to study ability-torepay’’ before amending the General QM 

definition. However, the Bureau has 

already done so by completing the 

Assessment Report and through its 

monitoring of the performance of 

mortgage loans and the availability of 

mortgage credit. 

Description of the Baseline 

The Bureau considers the benefits, 

costs, and impacts of this final rule 

against the baseline in which the Bureau 

takes no action and the Temporary GSE 

QM loan definition expires when the 

GSEs cease to operate under 

conservatorship. Under this final rule, 

creditors that wish to originate General 

QMs will be required to comply with 

the amended General QM loan 

definition either at the time or after the 

Temporary GSE QM loan definition 

expires, depending on whether the GSEs 

remain in conservatorship on the 

mandatory compliance date of this final 

rule. As a result, this final rule’s direct 

market impacts are considered relative 

to a baseline in which the Temporary 

GSE QM has expired and no changes 

have been made to the General QM loan 

definition. While there is not a fixed 

date on which the Temporary GSE QM 

loan definition will expire in the 

absence of this final rule, the Bureau 

anticipates that the GSEs will cease to 

operate under conservatorship in the 

foreseeable future and the baseline will 

occur at that time. Unless described 

otherwise, estimated loan counts under 

the baseline, final rule, and alternatives 

are annual estimates. 

Under the baseline, conventional 

loans could receive QM status under the 

Bureau’s rules only by underwriting 

according to the General QM 

requirements, Small Creditor QM 

requirements, Balloon Payment QM 

requirements, or the expanded portfolio 

QM amendments created by the 2018 

Economic Growth, Regulatory Relief, 

and Consumer Protection Act. The 

General QM loan definition, which 

would be the only type of QM available 

to larger creditors for conventional 

loans, requires that consumers’ DTI ratio 

not exceed 43 percent and requires 

creditors to determine debt and income 

in accordance with the standards in 

appendix Q. 

The Bureau anticipates that, under the 

baseline in which the Temporary GSE 

QM loan definition expires, there are 

two main types of conventional loans 

that would be affected: Over-43-PercentDTI 364 GSE loans and GSE-eligible 

loans without appendix Q-required 

documentation. These loans are 

currently originated as QMs due to the 

Temporary GSE QM loan definition but 

would not be originated as General 

QMs, and may not be originated at all, 

if the Temporary GSE QM loan 

definition were to expire without this 

final rule’s amendments to the General 

QM loan definition. This section 1022 

analysis refers to these loans as 

potentially displaced loans. 

The proposal’s analysis of the 

potential market impact of the 

Temporary GSE QM loan definition’s 

expiration cited data and analysis from 

the Bureau’s ANPR, as described below. 

None of the comments on the proposal 

challenged the data or analysis from the 

ANPR or the proposal related to the 

potential market impacts of the 

Temporary GSE QM loan definition’s 

expiration. The Bureau concludes that 

the data and analysis in the proposal 

and ANPR provide a well-supported 

estimate of the potential impact of the 

Temporary GSE QM loan definition’s 

expiration for this final rule. 

Over-43-Percent-DTI GSE Loans. The 

ANPR provided an estimate of the 

number of loans potentially affected by 

the expiration of the Temporary GSE 

QM loan definition.365 In providing the 

estimate, the ANPR focused on loans 

that fall within the Temporary GSE QM 

loan definition but not the General QM 

loan definition because they have DTI 

ratios above 43 percent. This final rule 

refers to these loans as Over-43-PercentDTI GSE loans. Based on NMDB data, 

the Bureau estimated that there were 

approximately 6.01 million closed-end 

first-lien residential mortgage 

originations in the United States in 

2018.366 Based on supplemental data 

provided by the FHFA, the Bureau 

estimated that the GSEs purchased or 

guaranteed 52 percent—roughly 3.12 

million—of those loans.367 Of those 3.12 

million loans, the Bureau estimated that 

31 percent—approximately 957,000 

loans—had DTI ratios greater than 43 

percent.368 Thus, the Bureau estimated 

that, as a result of the General QM loan 

definition’s 43 percent DTI limit, 

approximately 957,000 loans—16 

percent of all closed-end first-lien 

residential mortgage originations in 

2018—were Over-43-Percent-DTI GSE 

loans.369 This estimate does not include 

Temporary GSE QMs that were eligible 

for purchase by the GSEs but were not 

sold to the GSEs. 

Loans Without Appendix Q-Required 

Documentation That Are Otherwise 

GSE-Eligible. In addition to Over-43- 

Percent-DTI GSE loans, the Bureau 

noted that an additional, smaller 

number of Temporary GSE QMs with 

DTI ratios of 43 percent or less, when 

calculated using GSE underwriting 

guides, may not fall within the General 

QM loan definition because their 

method of verifying income or debt is 

incompatible with appendix Q.370 These 

loans would also likely be affected once 

the Temporary GSE QM loan definition 

expires. The Bureau understands, from 

extensive public feedback and its own 

experience, that appendix Q does not 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86389 

371For example, in qualitative responses to the 

Bureau’s Lender Survey conducted as part of the 

Assessment, underwriting for self-employed 

borrowers was one of the most frequently reported 

sources of difficulty in originating mortgages using 

appendix Q. These concerns were also raised in 

comments submitted in response to the Assessment 

RFI, noting that appendix Q is ambiguous with 

respect to how to treat income for consumers who 

are self-employed, have irregular income, or want 

to use asset depletion as income. See Assessment 

Report, supra note 63, at 200. 

372 Id. at 107 (‘‘For context, total jumbo purchase 

originations increased from an estimated 108,700 to 

130,200 between 2013 and 2014, based on 

nationally representative NMDB data.’’). 

373 Id. at 118 (‘‘The Application Data indicates 

that, notwithstanding concerns that have been 

expressed about the challenge of documenting and 

verifying income for self-employed borrowers under 

the General QM standard and the documentation 

requirements contained in appendix Q to the Rule, 

approval rates for non-High DTI, non-GSE eligible 

self-employed borrowers have decreased only 

slightly, by 2 percentage points . . . .’’). 

374See part V.B for additional discussion of 

concerns raised about appendix Q. 

375This estimate includes only HMDA loans 

which have a reported DTI and rate spread over 

APOR, and thus may underestimate the true 

number of loans gaining QM status under the 

proposal. 

376The Bureau expects consumers could continue 

to obtain FHA loans where such loans were cheaper 

or preferred for other reasons. 

377Based on NMDB data, the Bureau estimates 

that the average loan amount among High-DTI GSE 

borrowers in 2018 was $250,000. While the time to 

repayment for mortgages varies with economic 

conditions, the Bureau estimates that half of 

mortgages are typically closed or paid off five to 

seven years into repayment. Payment comparisons 

based on typical 2018 HMDA APRs for GSE loans, 

5 percent for borrowers with credit scores over 720, 

and 6 percent for borrowers with credit scores 

below 680 and LTVs exceeding 85 percent. 

378This approximation assumes $4,000 in savings 

from total loan costs for all 959,000 consumers. 

Actual expected savings would vary substantially 

based on loan and credit characteristics, consumer 

choices, and market conditions. 

specifically address whether and how to 

verify certain forms of income. The 

Bureau understands these concerns are 

particularly acute for self-employed 

consumers, consumers with part-time 

employment, and consumers with 

irregular or unusual income streams.371

As a result, these consumers’ access to 

credit may be affected if the Temporary 

GSE QM loan definition were to expire 

without amendments to the General QM 

loan definition. 

The Bureau’s analysis of the market 

under the baseline focuses on Over-43- 

Percent-DTI GSE loans because the 

Bureau estimates that most potentially 

displaced loans are Over-43-Percent-DTI 

GSE loans. The Bureau also lacks the 

loan-level documentation and 

underwriting data necessary to estimate 

with precision the number of potentially 

displaced loans that do not fall within 

the other General QM requirements and 

are not Over-43-Percent-DTI GSE loans. 

However, the Assessment did not find 

evidence of substantial numbers of 

loans in the non-GSE-eligible jumbo 

market being displaced when appendix 

Q verification requirements became 

effective in 2014.372 Further, the 

Assessment Report found evidence of 

only a limited reduction in the approval 

rate of self-employed applicants for nonGSE eligible mortgages.373 Based on this 

evidence, along with qualitative 

comparisons of GSE and appendix Q 

verification requirements and available 

data on the prevalence of borrowers 

with non-traditional or difficult-todocument income (e.g., self-employed 

borrowers, retired borrowers, those with 

irregular income streams), the Bureau 

estimates this second category of 

potentially displaced loans is 

considerably less numerous than the 

category of Over-43-Percent-DTI GSE 

loans. 

Additional Effects on Loans Not 

Displaced. While the most significant 

market effects under the baseline are 

displaced loans, loans that continue to 

be originated as QMs after the 

expiration of the Temporary GSE QM 

loan definition would also be affected. 

After the expiration date, all loans with 

DTI ratios at or below 43 percent which 

are or would have been purchased and 

guaranteed as GSE loans under the 

Temporary GSE QM loan definition— 

approximately 2.16 million loans in 

2018—and that continue to be 

originated as General QMs after the 

provision expires would be required to 

verify income and debts according to 

appendix Q, rather than only according 

to GSE guidelines. Given the concerns 

raised about appendix Q’s ambiguity 

and lack of flexibility, this would likely 

entail both increased documentation 

burden for some consumers as well as 

increased costs or time-to-origination for 

creditors on some loans.374

B. Benefits and Costs to Covered Persons 

and Consumers 

1. Benefits to Consumers 

The primary benefit to consumers of 

this final rule is increased access to 

credit, largely through the expanded 

availability of Over-43-Percent-DTI 

conventional QMs. Given the large 

number of consumers who obtain Over43-Percent-DTI GSE loans rather than 

available alternatives, including loans 

from the private non-QM market and 

FHA loans, such Over-43-Percent-DTI 

conventional QMs may be preferred due 

to their pricing, underwriting 

requirements, or other features. Based 

on HMDA data, the Bureau estimates 

that 959,000 Over-43-Percent-DTI 

conventional loans in 2018 would fall 

outside the QM definitions under the 

baseline, but fall within this final rule’s 

amended General QM loan 

definition.375 In addition, some 

consumers who would have been 

limited in the amount they could 

borrow due to the DTI limit under the 

baseline will likely be able to obtain 

larger mortgages at higher DTI levels. 

Under the baseline, a sizeable share of 

potentially displaced Over-43-PercentDTI GSE loans may instead be 

originated as FHA loans. Thus, under 

this final rule, any price advantage of 

GSE or other conventional QMs over 

FHA loans will be a realized benefit to 

consumers. Based on the Bureau’s 

analysis of 2018 HMDA data, FHA loans 

comparable to the loans received by 

Over-43-Percent-DTI GSE borrowers, 

based on loan purpose, credit score, and 

combined LTV ratio, on average have 

$3,000 to $5,000 higher upfront total 

loan costs at origination. APRs provide 

an alternative, annualized measure of 

costs over the life of a loan. FHA 

borrowers typically pay different APRs, 

which can be higher or lower than APRs 

for GSE loans depending on a 

borrower’s credit score and LTV ratio. 

Borrowers with credit scores at or above 

720 pay an APR 30 to 60 basis points 

higher than borrowers of comparable 

GSE loans, leading to higher monthly 

payments over the life of the loan. 

However, FHA borrowers with credit 

scores below 680 and combined LTV 

ratios exceeding 85 percent pay an APR 

20 to 40 basis points lower than 

borrowers of comparable GSE loans, 

leading to lower monthly payments over 

the life of the loan.376 For a loan size of 

$250,000, these APR differences amount 

to $2,800 to $5,600 in additional total 

monthly payments over the first five 

years of mortgage payments for 

borrowers with credit scores above 720, 

and $1,900 to $3,800 in reduced total 

monthly payments over five years for 

borrowers with credit scores below 680 

and LTV ratios exceeding 85 percent.377

Thus, all FHA borrowers are likely to 

pay higher costs at origination, while 

some pay higher monthly mortgage 

payments, and others pay lower 

monthly mortgage payments. Assuming 

for comparison that all 959,000 

additional loans falling within the 

amended General QM loan definition 

would be made as FHA loans in the 

absence of this final rule, the average of 

the upfront pricing estimates results in 

total savings for consumers of roughly 

$4 billion per year on upfront costs.378

The total savings or costs over the life 

of the loan based on APR differences 


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86390 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

379See Assessment Report supra note 63, at 10– 

11, 117, 131–47. 

380 In the proposal, the Bureau stated that 8,000 

to 59,000 additional loans annually would become 

delinquent within two years of origination under 

the proposal. The Bureau’s has revised its range of 

estimates under the proposal to 8,000 to 56,000. 

would vary substantially across 

borrowers depending on credit scores, 

LTV ratios, and length of time holding 

the mortgage. While this comparison 

assumed all potentially displaced loans 

would be made as FHA loans, higher 

costs (either upfront or in monthly 

payments) are likely to prevent some 

borrowers from obtaining loans at all. 

In the absence of this final rule, some 

of these potentially displaced 

consumers, particularly those with 

higher credit scores and the resources to 

make larger down payments, likely 

would be able to obtain credit in the 

non-GSE private market at a cost 

comparable to or slightly higher than 

the costs for GSE loans, but below the 

cost of an FHA loan. As a result, the 

above cost comparisons between GSE 

and FHA loans provide an estimated 

upper bound on pricing benefits to 

consumers of this final rule. However, 

under the baseline, some potentially 

displaced consumers may not obtain 

loans, and thus will experience benefits 

of credit access under this final rule. As 

discussed above, the Assessment Report 

found that the January 2013 Final Rule 

eliminated between 63 and 70 percent 

of home purchase loans with DTI ratios 

above 43 percent that were not 

Temporary GSE QMs.379

This final rule will also benefit those 

consumers with incomes difficult to 

verify using appendix Q to obtain 

General QM status, as this final rule’s 

General QM amendments will no longer 

require the use of appendix Q for 

verification of income. Under this final 

rule—as under the current rule— 

creditors will be required to verify 

income and assets in accordance with 

§ 1026.43(c)(4) and debt obligations, 

alimony, and child support in 

accordance with § 1026.43(c)(3). This 

final rule also states that a creditor 

complies with the General QM 

requirement to verify income, assets, 

debt obligations, alimony, and child 

support if it complies with verification 

requirements in standards the Bureau 

specifies. The greater flexibility of 

verification standards allowed under 

this final rule is likely to reduce effort 

and costs for these consumers, and in 

the most difficult cases in which 

consumers’ documentation cannot 

satisfy appendix Q, this final rule will 

allow consumers to obtain General QMs 

rather than potential FHA or non-QM 

alternatives. These consumers—likely 

including self-employed borrowers and 

those with non-traditional forms of 

income—will likely benefit from cost 

savings under this final rule, similar to 

those for High-DTI consumers discussed 

above. 

Finally, as noted below under ‘‘Costs 

to consumers,’’ the Bureau estimates 

that 25,000 low-DTI conventional loans 

which are QM under the baseline will 

fall outside the amended QM definition 

under this final rule, due to exceeding 

the pricing thresholds in 

§ 1026.43(e)(2)(vi). If consumers of such 

loans are able to obtain non-QM loans 

with the amended General QM loan 

definition in place, they will gain the 

benefit of the ability-to-repay causes of 

action and defenses against foreclosure. 

However, some of these consumers may 

instead obtain FHA loans with QM 

status. 

2. Benefits to Covered Persons 

This final rule’s primary benefit to 

covered persons, specifically mortgage 

creditors, is the expanded profits from 

originating Over-43-Percent DTI 

conventional QMs. Under the baseline, 

creditors would be unable to originate 

such loans under the Temporary GSE 

QM loan definition and would instead 

have to originate loans with comparable 

DTI ratios as FHA, Small Creditor QM, 

or non-QM loans, or originate at lower 

DTI ratios as conventional General QMs. 

Creditors’ current preference for 

originating large numbers of Over-43- 

Percent-DTI Temporary GSE QMs likely 

reflects advantages in a combination of 

costs or guarantee fees (particularly 

relative to FHA loans), liquidity 

(particularly relative to Small Creditor 

QM), or litigation and credit risk 

(particularly relative to non-QM loans). 

Moreover, QMs—including Temporary 

GSE QMs—are exempt from the DoddFrank Act risk retention requirement 

whereby creditors that securitize 

mortgage loans are required to retain at 

least 5 percent of the credit risk of the 

security, which adds significant cost. As 

a result, this final rule conveys benefits 

to mortgage creditors originating Over43-Percent-DTI conventional QMs on 

each of these dimensions. 

In addition, for those lower-DTI GSE 

loans that could satisfy General QM 

requirements, creditors may realize cost 

savings from underwriting loans using 

the more flexible verification standards 

allowed under this final rule compared 

with using appendix Q. Under this final 

rule, creditors will be required to 

consider DTI or residual income in 

addition to income or assets other than 

the value of the dwelling and debts but 

will not need to comply with the 

appendix Q standards required for 

General QMs under the baseline. For 

conventional consumers unable to 

provide documentation compatible with 

appendix Q, this final rule allows such 

loans to continue receiving QM status, 

providing comparable benefits to 

creditors as described for Over-43- 

Percent-DTI GSE loans above. 

Finally, creditors with business 

models that rely most heavily on 

originating Over-43-Percent-DTI GSE 

loans will likely see a competitive 

benefit from the continued ability to 

originate such loans as General QMs. 

Under the baseline, creditors that 

primarily originate FHA or private nonQM loans likely would have gained 

market share at the expense of creditors 

originating many Over-43-Percent-DTI 

GSE loans. The final rule will prevent 

this shift from occurring, which is 

effectively a transfer in market share to 

the creditors originating many Over-43- 

Percent-DTI GSE loans. 

3. Costs to Consumers 

As discussed above, relative to the 

baseline, the Bureau estimates that 

959,000 additional Over-43-Percent-DTI 

loans could be originated as General 

QMs under this final rule. Some of these 

loans would have been non-QM loans (if 

originated) under the baseline. As a 

result, this final rule is likely to increase 

the number of consumers who become 

delinquent on QMs, meaning an 

increase in consumers with delinquent 

loans who do not have the benefit of the 

ability-to-repay causes of action and 

defenses against foreclosure. 

Tables 5 and 6 in part V provide 

historical early delinquency rates for 

loans under different combinations of 

DTI ratio and rate spread. Under this 

final rule, conventional loans originated 

with rate spreads below 2.25 percentage 

points and DTI above 43 percent will 

newly fall within the amended General 

QM loan definition relative to the 

baseline. Based on the number and 

characteristics of 2018 HMDA 

originations, the Bureau estimates that 

between 8,000 and 58,000 additional 

General QMs annually could become 

delinquent within two years of 

origination, based on the observed early 

delinquencies from Table 6 (2018) and 

Table 5 (2002–2008), respectively.380

Further, consumers who would have 

been limited in the amount they could 

borrow due to the DTI limit under the 

baseline may obtain larger mortgages at 

higher DTI levels, further increasing the 

expected number of delinquencies. 

However, given that many of these loans 

may have been originated as FHA (or 

other non-General QM) loans under the 

baseline, the increase in delinquent 


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381The comparable thresholds are 6.5 percentage 

points over APOR for loans priced under $66,156, 

3.5 percentage points over APOR for loans priced 

under $110,260 but at or above $66,156, and 6.5 

percentage points over APOR for loans for 

manufactured housing priced under $110,260. 

loans held by consumers without the 

ability-to-repay causes of action and 

defenses against foreclosure is likely 

smaller than the upper bound estimates 

cited above. 

For the estimated 25,000 consumers 

obtaining low-DTI General QM or 

Temporary GSE QMs priced 2.25 

percentage points or more above APOR 

under the baseline, the amended 

General QM loan definition may restrict 

access to conventional QM credit. There 

are several possible outcomes for these 

consumers. Many may instead obtain 

FHA loans, likely paying higher total 

loan costs, as discussed above. Others 

may be able to obtain General QMs 

priced below 2.25 percentage points 

over APOR due to creditor responses to 

this final rule or obtain loans under the 

Small Creditor QM definition. However, 

some consumers may not be able to 

obtain a mortgage at all. 

In addition, this final rule reduces the 

scope of the non-QM market relative to 

the baseline, which could slow the 

development of new non-QM loan 

products which may have become 

available under the baseline. To the 

extent that some consumers would 

prefer some of these products to 

conventional QMs due to pricing, 

verification flexibility, or other 

advantages, the delay of their 

development will be a cost to 

consumers of this final rule. 

4. Costs to Covered Persons 

For creditors retaining the credit risk 

of their General QM mortgages (e.g., 

portfolio loans and private 

securitizations), an increase in Over-43- 

Percent-DTI General QM originations 

may lead to increased risk of credit 

losses. However, some of this increased 

risk may be offset by lender pricing 

responses. Further, on average the 

effects on portfolio lenders may be 

small. Creditors that hold loans on 

portfolio have an incentive to verify 

ability to repay regardless of liability 

under the ATR provisions, because they 

hold the credit risk. While portfolio 

lenders (or those that manage the 

portfolios) may recognize and respond 

to this incentive to different degrees, 

this final rule is likely on average to 

cause a small increase in the willingness 

of these creditors to originate loans with 

a greater risk of default and credit 

losses, such as certain loans with high 

DTI ratios. The credit losses to investors 

in private securitizations are harder to 

predict. In general, these losses will 

depend on the scrutiny that investors 

are willing and able to give to the nonQM loans under the baseline that 

become QMs (with high DTI ratios) 

under this final rule. It is possible, 

however, that the reduction in liability 

under the ATR provisions will lead to 

securitizations with more loans that 

have a greater risk of default and credit 

losses. 

In addition, creditors will generally 

no longer be able to originate low-DTI 

conventional loans priced 2.25 

percentage points or higher above APOR 

as General QMs under this final rule.381

Creditors may be able to originate some 

of these loans at prices below 2.25 

percentage points above APOR or as 

non-QM loans or other types of QMs, 

but in these cases may pay higher costs 

or receive lower revenues relative to 

under the baseline. If creditors are 

unable to originate such loans at all, 

they will see a larger reduction in 

revenue. 

This final rule also generates what are 

effectively transfers between creditors 

relative to the baseline, reflecting 

reduced loan origination volume for 

creditors that primarily originate FHA 

or private non-QM loans and increased 

origination volume for creditors that 

primarily originate conventional QMs. 

Business models vary substantially 

within market segments, with portfolio 

lenders and lenders originating non-QM 

loans most likely to forgo market share 

gains possible under the baseline, while 

GSE-focused bank and non-bank 

creditors are likely to maintain market 

share that might be lost in the absence 

of this final rule. 

5. Other Benefits and Costs 

This final rule may limit the 

development of the secondary market 

for non-QM mortgage loan securities. 

Under the baseline, loans that do not fit 

within General QM requirements 

represent a potential new market for 

non-QM loan securitizations. Thus, this 

final rule will reduce the scope of the 

potential non-QM loan market, likely 

lowering total profits and revenues for 

participants in the private secondary 

market. This will effectively be a 

transfer from these non-QM loan 

secondary market participants to 

participants in the agency or other QM 

secondary markets. 

6. Consideration of Alternatives 

The Bureau considered potential 

alternatives to this final rule, including 

maintaining the General QM loan 

definition’s DTI limit but at a higher 

level, for example, 45 or 50 percent. The 

Bureau estimates the effects of such 

alternatives relative to this final rule, 

assuming no change in consumer or 

creditor behavior. For an alternative 

General QM loan definition with a DTI 

limit of 45 percent, the Bureau estimates 

that 673,000 fewer loans would have 

been General QM due to DTI ratios over 

45 percent, while 28,000 additional 

loans with rate spreads above the final 

rule’s QM pricing thresholds would 

have newly fit within the General QM 

loan definition due to DTI ratios at or 

below 45 percent. For an alternative DTI 

limit of 50 percent, the Bureau estimates 

51,000 fewer loans would have fit 

within the General QM loan definition 

due to DTI ratios over 50 percent, while 

35,000 additional loans with rate 

spreads above the final rule’s QM 

pricing thresholds would have newly fit 

within the General QM loan definition 

due to DTI ratios at or below 50 percent. 

In addition to these effects on the 

composition of loans within the General 

QM loan definition, the Bureau uses the 

historical delinquency rates from Tables 

5 and 6 in part V to estimate the number 

of loans that would have been expected 

to become delinquent within the 

General QM loan definition relative to 

this final rule. The Bureau estimates 

that under an alternative DTI limit of 45 

percent, 4,000 to 37,000 fewer General 

QMs would have become delinquent 

relative to this final rule, based on 

delinquency rates for 2018 and 2002– 

2008 originations respectively. Under an 

alternative DTI limit of 50 percent, the 

Bureau estimates approximately 1,000 

additional General QMs would have 

become delinquent relative to this final 

rule, due to loans priced 2.25 percentage 

points or more above APOR gaining QM 

status. 

For an alternative DTI limit of 45 

percent, these estimates collectively 

indicate that substantially fewer loans 

would have fit within the General QM 

loan definition relative to this final rule, 

which would also have reduced the 

number of General QMs becoming 

delinquent. By contrast, the estimates 

indicate that an alternative DTI limit of 

50 percent would have led to a 

comparable number of General QMs 

relative to this final rule, both overall 

and among those that would have 

become delinquent. However, consumer 

and creditor responses to such 

alternatives, such as reducing loan 

amounts to lower DTI ratios, could have 

increased the number of loans that 

would have fit within the alternative 

General QM loan definitions relative to 

this final rule. 

The Bureau considered other 

potential alternatives to the proposed 

rule, including imposing a DTI limit 

only for loans above a certain pricing 


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382Alternative approaches, such as retaining a 

DTI limit of 45 or 50 percent, would have had 

similar effects of allowing small depository 

creditors to originate more GSE loans under an 

expanded General QM loan definition relative to 

the baseline, while offsetting potential competitive 

advantages for small depository creditors that 

originate Small Creditor QMs. 

383These statistics are estimated based on 

originations from the first nine months of the year, 

to allow time for loans to be sold before HMDA 

reporting deadlines. In addition, a higher share of 

Over-43-Percent-DTI conventional purchase nonrural loans (33.3 percent) report being sold to other 

non-GSE purchasers compared to rural loans (22.3 

percent). 

384For alternative approaches, the Bureau 

estimates 83.3 percent of conventional purchase 

loans for homes in rural areas would have been 

QMs under a DTI limit of 45 percent, and 95.1 

percent of conventional purchase loans for homes 

in rural areas would have been QMs under a DTI 

limit of 50 percent. 

385 5 U.S.C. 601(3) (the Bureau may establish an 

alternative definition after consultation with the 

Small Business Administration and an opportunity 

for public comment). 

386 5 U.S.C. 603 through 605. 

387 5 U.S.C. 609. 

388Non-depositories are classified as small 

entities if they had fewer than 5,188 total 

originations in 2018. The classification for nondepositories is based on the SBA small entity 

definition for mortgage companies (less than $41.5 

million in annual revenues) and an estimate of 

$8,000 for revenue-per-origination from the 

Assessment Report, supra note 63, at 78. The 

threshold, for example a DTI limit of 50 

percent for loans with rate spreads at or 

above 1 percentage point. Such an 

alternative would have functioned as a 

hybrid of this final rule and an 

alternative which maintains a DTI limit 

at a higher level, 50 percent in the case 

of this example. As a result, the number 

of loans fitting within the General QM 

loan definition would have generally 

been between the Bureau’s estimates for 

this final rule and its estimates for the 

corresponding alternative which would 

have maintained the higher DTI limit. 

Thus, this hybrid approach would have 

brought fewer loans within the General 

QM loan definition compared to this 

final rule but more loans within the 

General QM loan definition compared to 

the alternative DTI limit of 50 percent, 

both overall and among loans that 

would have become delinquent. 

C. Potential Impact on Depository 

Institutions and Credit Unions With $10 

Billion or Less in Total Assets, as 

Described in Section 1026 

This final rule’s expected impact on 

depository institutions and credit 

unions that are also creditors making 

covered loans (depository creditors) 

with $10 billion or less in total assets is 

similar to the expected impact on larger 

depository creditors and on nondepository creditors. As discussed in 

part VIII.B.4 (Costs to Covered Persons), 

depository creditors originating 

portfolio loans may forgo potential 

market share gains that would occur 

under the baseline. In addition, 

depository creditors with $10 billion or 

less in total assets that originate 

portfolio loans can originate Over-43- 

Percent-DTI Small Creditor QMs under 

the rule. These depository creditors may 

currently rely less on the Temporary 

GSE QM loan definition for originating 

Over-43-Percent-DTI loans. If the 

expiration of the Temporary GSE QM 

loan definition in the absence of this 

final rule would confer a competitive 

advantage to these small creditors in 

their origination of Over-43-Percent-DTI 

loans, this final rule will offset this 

outcome. 

Conversely, those small depository 

creditors that primarily rely on the GSEs 

as a secondary market outlet because 

they do not have the capacity to hold 

numerous loans on portfolio or the 

infrastructure or scale to securitize loans 

may continue to benefit from the ability 

to make Over-43-Percent-DTI GSE loans 

as QMs. Under the baseline, these 

creditors would be limited to originating 

GSE loans as QMs only with DTI ratios 

at or below 43 percent under the current 

General QM loan definition. These 

creditors may also originate FHA, VA, 

or USDA loans or non-QM loans for 

private securitizations, likely at a higher 

cost relative to originating Temporary 

GSE QMs. This final rule will allow 

these creditors to originate more GSE 

loans under the General QM loan 

definition and have a lower cost of 

origination relative to the baseline.382

D. Potential Impact on Rural Areas 

This final rule’s expected impact on 

rural areas is similar to the expected 

impact on non-rural areas. Based on 

2018 HMDA data, the Bureau estimates 

that Over-43-Percent-DTI conventional 

purchase mortgages originated for 

homes in rural areas are approximately 

as likely to be reported as initially sold 

to the GSEs (52.5 percent) as loans in 

non-rural areas (52 percent).383 In 

addition, the Bureau estimates that in 

2018, 94.6 percent of conventional 

purchase loans originated for homes in 

rural areas would have been QMs under 

this final rule, similar to the Bureau’s 

estimate for all conventional purchase 

loans in rural and non-rural areas (96.3 

percent).384

IX. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (RFA), 

as amended by the Small Business 

Regulatory Enforcement Fairness Act of 

1996, 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.385

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).386 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.387

In the proposal, the Bureau certified 

that an IRFA was not required because 

the proposal, if adopted, would not have 

a SISNOSE. The Bureau did not receive 

comments on its analysis of the impact 

of the proposal on small entities. As the 

below analysis makes clear, relative to 

the baseline, this final rule has only one 

sizeable adverse effect. Certain loans 

with DTI ratios under 43 percent that 

would otherwise be originated as 

rebuttable presumption QMs under the 

baseline will be non-QM loans under 

this final rule. This final rule will also 

have a number of more minor effects on 

small entities which are not quantified 

in this analysis, including adjustments 

to the APR calculation used for certain 

ARMs when determining QM status and 

amendments to the Rule’s requirements 

to consider and verify income, assets, 

debt obligations, alimony, and child 

support. The Bureau expects only small 

increases or decreases in burden from 

these more minor effects. 

The analysis divides potential 

originations into different categories and 

considers whether this final rule has 

any adverse impact on originations 

relative to the baseline. Note that under 

the baseline, the category of Temporary 

GSE QMs no longer exists. The Bureau 

has identified five categories of small 

entities that may be subject to this final 

rule: Commercial banks, savings 

institutions and credit unions (NAICS 

522110, 522120, and 522130) with 

assets at or below $600 million; 

mortgage brokers (NAICS 522310) with 

average annual receipts at or below $8 

million; and mortgage companies 

(NAICS 522292 and 522298) with 

average annual receipts at or below 

$41.5 million. As discussed further 

below, the Bureau relies primarily on 

2018 HMDA data for the analysis.388


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HMDA data do not directly distinguish mortgage 

brokers from mortgage companies, so the more 

inclusive revenue threshold is used. 

389 In addition, all loans for manufactured 

housing under $110,260 with APR less than 6.5 

percentage points over APOR can be originated as 

General QMs, assuming they meet all other General 

QM requirements. 

390 44 U.S.C. 3501 et seq. 

391 5 U.S.C. 801 et seq. 

Type I: First Liens That Are Not Small 

Loans, DTI Is Over 43 Percent 

Under the baseline, small entities 

cannot originate Type I loans as safe 

harbor or rebuttable presumption QMs 

unless they are also small creditors and 

comply with the additional 

requirements of the small creditor QM 

category. Neither the removal of DTI 

requirements nor the addition of the 

pricing conditions has an adverse 

impact on the ability of small entities to 

originate these loans. 

Type II: First Liens That Are Not Small 

Loans, DTI Is 43 Percent or Under 

Under the baseline, small entities can 

originate these loans as either safe 

harbor QMs or rebuttable presumption 

QMs, depending on pricing. The 

removal of DTI requirements has no 

adverse impact on the ability of small 

entities to originate these loans. The 

addition of the pricing conditions has 

no adverse impact on the ability of 

small creditors to originate these loans 

as safe harbor QMs: A loan with APR 

within 1.5 percentage points of APOR 

that can be originated as a safe harbor 

QM under the baseline can be originated 

as a safe harbor QM under the pricing 

conditions of this final rule. Similarly, 

the addition of the pricing conditions 

has no adverse impact on the ability of 

small creditors to originate rebuttable 

presumption QMs with APR between 

1.5 percentage points and 2.25 

percentage points over APOR. The 

addition of the pricing conditions will, 

however, prevent small creditors from 

originating rebuttable presumption QMs 

with APR 2.25 percentage points or 

more over APOR. In the SISNOSE 

analysis below, the Bureau 

conservatively assumes that none of 

these loans will be originated. 

Type III: First-Liens That Are Small 

Loans 

Under the baseline, small entities can 

originate these loans as General QMs if 

they have DTI ratios at or below the DTI 

limit of 43 percent. This final rule’s 

amended General QM loan definition 

preserves QM status for some smaller, 

low-DTI loans priced 2.25 percentage 

points or more over APOR. Specifically, 

loans under $66,156 with APR less than 

6.5 percentage points over APOR and 

loans under $110,260 with APR less 

than 3.5 percentage points over APOR 

can be originated as General QMs, 

assuming they meet all other General 

QM requirements.389 This final rule will 

prevent small creditors from originating 

smaller, low-DTI loans with APR at or 

above these higher thresholds as 

General QMs. For the SISNOSE analysis 

below, the Bureau conservatively 

assumes that none of these loans will be 

originated. 

Type IV: Closed-End Subordinate-Liens 

Under the baseline, small entities can 

originate these loans as General QMs if 

they have DTI ratios at or below the DTI 

limit of 43 percent. This final rule’s 

amended General QM loan definition 

creates new pricing thresholds for 

subordinate-lien originations. 

Subordinate-lien loans under $66,156 

with APR less than 6.5 percentage 

points over APOR and larger 

subordinate-lien loans with APR less 

than 3.5 percentage points over APOR 

can be originated as General QMs, 

assuming they meet all other General 

QM requirements. The final rule will 

prevent small creditors from originating 

low-DTI, subordinate-lien loans with 

APR at or above these thresholds as 

General QMs. For the SISNOSE analysis 

below, the Bureau conservatively 

assumes that none of these loans will be 

originated. 

Analysis 

For purposes of this analysis, the 

Bureau assumes that average annual 

receipts for small entities is 

proportional to mortgage loan 

origination volume. The Bureau further 

assumes that a small entity experiences 

a significant negative effect from this 

final rule if it will cause a reduction in 

origination volume of over 2 percent. 

Using the 2018 HMDA data, the Bureau 

estimates that if none of the Type II, III, 

or IV loans adversely affected were 

originated, 97 small entities would 

experience a loss of over 2 percent in 

mortgage loan origination volume. Thus, 

there are at most 97 small entities that 

experience a significant adverse 

economic impact. The Bureau estimates 

that there are 2,027 small entities in the 

HMDA data. Ninety-seven is not a 

substantial number relative to 2,027. 

The Bureau recognizes that there are 

small entities that originate mortgage 

credit that do not report HMDA data. 

The Bureau has no reason to expect, 

however, that small entities that 

originate mortgage credit that do not 

report HMDA data would be affected 

differently than small HMDA reporters 

by the final rule. In other words, the 

Bureau expects that including HMDA 

non-reporters in the analysis would 

increase the number of small entities 

that will experience a loss of over 2 

percent in mortgage loan origination 

volume and the number of relevant 

small entities by the same proportion. 

Thus, the overall number of small 

entities that will experience a 

significant adverse economic impact 

will not be a substantial number of the 

overall number of small entities that 

originate mortgage credit. 

Accordingly, the Director certifies that 

this final rule will not have a significant 

economic impact on a substantial 

number of small entities. 

X. Paperwork Reduction Act 

Under the Paperwork Reduction Act 

of 1995 (PRA),390 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. 

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 amends 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,391 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 at least 60 days prior to the rule’s 

published effective date. The Office of 

Information and Regulatory Affairs has 

designated this rule as a ‘‘major rule’’ as 

defined by 5 U.S.C. 804(2). 

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. 


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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) 

■ 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 

■ 2. Amend § 1026.43 by revising 

paragraphs (b)(4), (e)(2)(v) and (vi), 

(e)(4), (e)(5)(i)(A) and (B), and (f)(1)(i) 

and (iii) to read as follows: 

§ 1026.43 Minimum standards for 

transactions secured by a dwelling. 

* * * * * 

(b) * * * 

(4) Higher-priced covered transaction 

means a covered transaction with an 

annual percentage rate that exceeds the 

average prime offer rate for a 

comparable transaction as of the date 

the interest rate is set by 1.5 or more 

percentage points for a first-lien covered 

transaction, other than a qualified 

mortgage under paragraph (e)(5), (e)(6), 

or (f) of this section; by 3.5 or more 

percentage points for a first-lien covered 

transaction that is a qualified mortgage 

under paragraph (e)(5), (e)(6), or (f) of 

this section; or by 3.5 or more 

percentage points for a subordinate-lien 

covered transaction. For purposes of a 

qualified mortgage under paragraph 

(e)(2) of this section, for a loan for 

which the interest rate may or will 

change within the first five years after 

the date on which the first regular 

periodic payment will be due, the 

creditor must determine the annual 

percentage rate for purposes of this 

paragraph (b)(4) by treating the 

maximum interest rate that may apply 

during that five-year period as the 

interest rate for the full term of the loan. 

* * * * * 

(e) * * * 

(2) * * * 

(v) For which the creditor, at or before 

consummation: 

(A) Considers 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, debt 

obligations, alimony, child support, and 

monthly debt-to-income ratio or 

residual income, using the amounts 

determined from paragraph (e)(2)(v)(B) 

of this section. For purposes of this 

paragraph (e)(2)(v)(A), the consumer’s 

monthly debt-to-income ratio or 

residual income is determined in 

accordance with paragraph (c)(7) of this 

section, except that the consumer’s 

monthly payment on the covered 

transaction, including the monthly 

payment for mortgage-related 

obligations, is calculated in accordance 

with paragraph (e)(2)(iv) of this section. 

(B)(1) Verifies 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 using 

third-party records that provide 

reasonably reliable evidence of the 

consumer’s income or assets, in 

accordance with paragraph (c)(4) of this 

section; and 

(2) Verifies the consumer’s current 

debt obligations, alimony, and child 

support using reasonably reliable thirdparty records in accordance with 

paragraph (c)(3) of this section. 

(vi) For which the annual percentage 

rate does not exceed the average prime 

offer rate for a comparable transaction as 

of the date the interest rate is set by the 

amounts specified in paragraphs 

(e)(2)(vi)(A) through (F) of this section. 

The amounts specified here shall be 

adjusted annually on January 1 by the 

annual percentage change in the 

Consumer Price Index for All Urban 

Consumers (CPI–U) that was reported 

on the preceding June 1. For purposes 

of this paragraph (e)(2)(vi), the creditor 

must determine the annual percentage 

rate for a loan for which the interest rate 

may or will change within the first five 

years after the date on which the first 

regular periodic payment will be due by 

treating the maximum interest rate that 

may apply during that five-year period 

as the interest rate for the full term of 

the loan. 

(A) For a first-lien covered transaction 

with a loan amount greater than or equal 

to $110,260 (indexed for inflation), 2.25 

or more percentage points; 

(B) For a first-lien covered transaction 

with a loan amount greater than or equal 

to $66,156 (indexed for inflation) but 

less than $110,260 (indexed for 

inflation), 3.5 or more percentage 

points; 

(C) For a first-lien covered transaction 

with a loan amount less than $66,156 

(indexed for inflation), 6.5 or more 

percentage points; 

(D) For a first-lien covered transaction 

secured by a manufactured home with 

a loan amount less than $110,260 

(indexed for inflation), 6.5 or more 

percentage points; 

(E) For a subordinate-lien covered 

transaction with a loan amount greater 

than or equal to $66,156 (indexed for 

inflation), 3.5 or more percentage 

points; 

(F) For a subordinate-lien covered 

transaction with a loan amount less than 

$66,156 (indexed for inflation), 6.5 or 

more percentage points. 

* * * * * 

(4) Qualified mortgage defined—other 

agencies. Notwithstanding paragraph 

(e)(2) of this section, a qualified 

mortgage is a covered transaction that is 

defined as a qualified mortgage by the 

U.S. Department of Housing and Urban 

Development under 24 CFR 201.7 and 

24 CFR 203.19, the U.S. Department of 

Veterans Affairs under 38 CFR 36.4300 

and 38 CFR 36.4500, or the U.S. 

Department of Agriculture under 7 CFR 

3555.109. 

(5) * * * 

(i) * * * 

(A) That satisfies the requirements of 

paragraph (e)(2) of this section other 

than the requirements of paragraphs 

(e)(2)(v) and (vi) of this section; 

(B) For which the creditor: 

(1) Considers and verifies at or before 

consummation 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, in 

accordance with paragraphs (c)(2)(i) and 

(c)(4) of this section; 

(2) Considers and verifies at or before 

consummation the consumer’s current 

debt obligations, alimony, and child 

support in accordance with paragraphs 

(c)(2)(vi) and (c)(3) of this section; 

(3) Considers at or before 

consummation the consumer’s monthly 

debt-to-income ratio or residual income 

and verifies the debt obligations and 

income used to determine that ratio in 

accordance with paragraph (c)(7) of this 

section, except that the calculation of 

the payment on the covered transaction 

for purposes of determining the 

consumer’s total monthly debt 

obligations in paragraph (c)(7)(i)(A) 

shall be determined in accordance with 

paragraph (e)(2)(iv) of this section 

instead of paragraph (c)(5) of this 

section; 

* * * * * 

(f) * * * 

(1) * * * 

(i) The loan satisfies the requirements 

for a qualified mortgage in paragraphs 


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(e)(2)(i)(A) and (e)(2)(ii) and (iii) of this 

section; 

* * * * * 

(iii) The creditor: 

(A) Considers and verifies at or before 

consummation 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, in 

accordance with paragraphs (c)(2)(i) and 

(c)(4) of this section; 

(B) Considers and verifies at or before 

consummation the consumer’s current 

debt obligations, alimony, and child 

support in accordance with paragraphs 

(c)(2)(vi) and (c)(3) of this section; 

(C) Considers at or before 

consummation the consumer’s monthly 

debt-to-income ratio or residual income 

and verifies the debt obligations and 

income used to determine that ratio in 

accordance with paragraph (c)(7) of this 

section, except that the calculation of 

the payment on the covered transaction 

for purposes of determining the 

consumer’s total monthly debt 

obligations in (c)(7)(i)(A) shall be 

determined in accordance with 

paragraph (f)(1)(iv)(A) of this section, 

together with the consumer’s monthly 

payments for all mortgage-related 

obligations and excluding the balloon 

payment; 

* * * * * 

Appendix Q to Part 1026 [Removed] 

■ 3. Remove appendix Q to part 1026. 

■ 4. In supplement I to part 1026, under 

Section 1026.43—Minimum Standards 

for Transactions Secured by a Dwelling: 

■ a. Under introductory paragraph 1, 

add introductory paragraph 2; 

■ b. Revise sections 43(b)(4) Higherpriced covered transaction, 43(c)(4) 

Verification of income or assets, and 

43(c)(7) Monthly debt-to-income ratio or 

residual income; 

■ c. Revise Paragraph 43(e)(2)(v); 

■ d. Add Paragraphs 43(e)(2)(v)(A) and 

43(e)(2)(v)(B) after Paragraph 43(e)(2)(v); 

■ e. Revise Paragraph 43(e)(2)(vi); 

■ f. Revise section 43(e)(4); and 

■ g. Revise Paragraph 43(e)(5) and 

Paragraphs 43(f)(1)(i), 43(f)(1)(ii), 

43(f)(1)(iii), 43(f)(1)(iv), 43(f)(1)(v), and 

43(f)(1)(vi),. 

The additions and revisions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Section 1026.43—Minimum Standards for 

Transactions Secured by a Dwelling 

* * * * * 

2. General QM Amendments Effective on 

March 1, 2021. The Bureau’s revisions to 

Regulation Z contained in Qualified 

Mortgage Definition Under the Truth in 

Lending Act (Regulation Z): General QM 

Loan Definition published on December 29, 

2020 (2021 General QM Amendments) apply 

with respect to transactions for which a 

creditor received an application on or after 

March 1, 2021 (effective date). Compliance 

with the 2021 General QM Amendments is 

mandatory with respect to transactions for 

which a creditor received an application on 

or after July 1, 2021 (mandatory compliance 

date). For a given transaction for which a 

creditor received an application on or after 

March 1, 2021 but prior to July 1, 2021, a 

person has the option of complying either: 

With 12 CFR part 1026 as it is in effect; or 

with 12 CFR part 1026 as it was in effect on 

February 26, 2021, together with any 

amendments to 12 CFR part 1026 that 

become effective after February 26, 2021, 

other than the 2021 General QM 

Amendments. For transactions subject to 

§ 1026.19(e), (f), or (g), creditors determine 

the date the creditor received the consumer’s 

application, for purposes of this comment, in 

accordance with § 1026.2(a)(3)(ii). For 

transactions that are not subject to 

§ 1026.19(e), (f), or (g), creditors can 

determine the date the creditor received the 

consumer’s application, for purposes of this 

comment, in accordance with either 

§ 1026.2(a)(3)(i) or (ii). 

* * * * * 

43(b)(4) Higher-Priced Covered Transaction 

1. Average prime offer rate. The average 

prime offer rate is defined in § 1026.35(a)(2). 

For further explanation of the meaning of 

‘‘average prime offer rate,’’ and additional 

guidance on determining the average prime 

offer rate, see comments 35(a)(2)–1 through 

–4. 

2. Comparable transaction. A higherpriced covered transaction is a consumer 

credit transaction that is secured by the 

consumer’s dwelling with an annual 

percentage rate that exceeds by the specified 

amount the average prime offer rate for a 

comparable transaction as of the date the 

interest rate is set. The published tables of 

average prime offer rates indicate how to 

identify a comparable transaction. See 

comment 35(a)(2)–2. 

3. Rate set. A transaction’s annual 

percentage rate is compared to the average 

prime offer rate as of the date the 

transaction’s interest rate is set (or ‘‘locked’’) 

before consummation. Sometimes a creditor 

sets the interest rate initially and then re-sets 

it at a different level before consummation. 

The creditor should use the last date the 

interest rate is set before consummation. 

4. Determining the annual percentage rate 

for certain loans for which the interest rate 

may or will change. Provisions in subpart C 

of this part, including the commentary to 

§ 1026.17(c)(1), address how to determine the 

annual percentage rate disclosures for closedend credit transactions. Provisions in 

§ 1026.32(a)(3) address how to determine the 

annual percentage rate to determine coverage 

under § 1026.32(a)(1)(i). Section 

1026.43(b)(4) requires, only for the purposes 

of a qualified mortgage under § 1026.43(e)(2), 

a different determination of the annual 

percentage rate for purposes of 

§ 1026.43(b)(4) for a loan for which the 

interest rate may or will change within the 

first five years after the date on which the 

first regular periodic payment will be due. 

See comment 43(e)(2)(vi)–4 for how to 

determine the annual percentage rate of such 

a loan. 

* * * * * 

43(c)(4) Verification of Income or Assets 

1. Income or assets relied on. A creditor 

need consider, and therefore need verify, 

only the income or assets the creditor relies 

on to evaluate the consumer’s repayment 

ability. See comment 43(c)(2)(i)–2. For 

example, if a consumer’s application states 

that the consumer earns a salary and is paid 

an annual bonus and the creditor relies on 

only the consumer’s salary to evaluate the 

consumer’s repayment ability, the creditor 

need verify only the salary. See also 

comments 43(c)(3)–1 and –2. 

2. Multiple applicants. If multiple 

consumers jointly apply for a loan and each 

lists income or assets on the application, the 

creditor need verify only the income or assets 

the creditor relies on in determining 

repayment ability. See comment 43(c)(2)(i)– 

5. 

3. Tax-return transcript. Under 

§ 1026.43(c)(4), a creditor may verify a 

consumer’s income using an Internal 

Revenue Service (IRS) tax-return transcript, 

which summarizes the information in a 

consumer’s filed tax return, another record 

that provides reasonably reliable evidence of 

the consumer’s income, or both. A creditor 

may obtain a copy of a tax-return transcript 

or a filed tax return directly from the 

consumer or from a service provider. A 

creditor need not obtain the copy directly 

from the IRS or other taxing authority. See 

comment 43(c)(3)–2. 

4. Unidentified funds. A creditor does not 

meet the requirements of § 1026.43(c)(4) if it 

observes an inflow of funds into the 

consumer’s account without confirming that 

the funds are income. For example, a creditor 

would not meet the requirements of 

§ 1026.43(c)(4) where it observes an 

unidentified $5,000 deposit in the 

consumer’s account but fails to take any 

measures to confirm or lacks any basis to 

conclude that the deposit represents the 

consumer’s personal income and not, for 

example, proceeds from the disbursement of 

a loan. 

* * * * * 

43(c)(7) Monthly Debt-to-Income Ratio or 

Residual Income 

1. Monthly debt-to-income ratio or monthly 

residual income. Under § 1026.43(c)(2)(vii), 

the creditor must consider the consumer’s 

monthly debt-to-income ratio, or the 

consumer’s monthly residual income, in 

accordance with the requirements in 

§ 1026.43(c)(7). Section 1026.43(c) does not 

prescribe a specific monthly debt-to-income 

ratio with which creditors must comply. 

Instead, an appropriate threshold for a 

consumer’s monthly debt-to-income ratio or 

monthly residual income is for the creditor 

to determine in making a reasonable and 


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86396 Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 

good faith determination of a consumer’s 

ability to repay. 

2. Use of both monthly debt-to-income 

ratio and monthly residual income. If a 

creditor considers the consumer’s monthly 

debt-to-income ratio, the creditor may also 

consider the consumer’s residual income as 

further validation of the assessment made 

using the consumer’s monthly debt-toincome ratio. 

3. Compensating factors. The creditor may 

consider factors in addition to the monthly 

debt-to-income ratio or residual income in 

assessing a consumer’s repayment ability. For 

example, the creditor may reasonably and in 

good faith determine that a consumer has the 

ability to repay despite a higher debt-toincome ratio or lower residual income in 

light of the consumer’s assets other than the 

dwelling, including any real property 

attached to the dwelling, securing the 

covered transaction, such as a savings 

account. The creditor may also reasonably 

and in good faith determine that a consumer 

has the ability to repay despite a higher debtto-income ratio in light of the consumer’s 

residual income. 

* * * * * 

Paragraph 43(e)(2)(v) 

1. General. For guidance on satisfying 

§ 1026.43(e)(2)(v), a creditor may rely on 

commentary to § 1026.43(c)(2)(i) and (vi), 

(c)(3), and (c)(4). 

Paragraph 43(e)(2)(v)(A) 

Consider. In order to comply with the 

requirement to consider under 

§ 1026.43(e)(2)(v)(A), a creditor must take 

into account 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, debt obligations, alimony, child 

support, and monthly debt-to-income ratio or 

residual income in its ability-to-repay 

determination. A creditor must maintain 

written policies and procedures for how it 

takes into account, pursuant to its 

underwriting standards, income or assets, 

debt obligations, alimony, child support, and 

monthly debt-to-income ratio or residual 

income in its ability-to-repay determination. 

A creditor must also retain documentation 

showing how it took into account income or 

assets, debt obligations, alimony, child 

support, and monthly debt-to-income ratio or 

residual income in its ability-to-repay 

determination, including how it applied its 

policies and procedures, in order to meet this 

requirement to consider and thereby meet the 

requirements for a qualified mortgage under 

§ 1026.43(e)(2). This documentation may 

include, for example, an underwriter 

worksheet or a final automated underwriting 

system certification, in combination with the 

creditor’s applicable underwriting standards 

and any applicable exceptions described in 

its policies and procedures, that shows how 

these required factors were taken into 

account in the creditor’s ability-to-repay 

determination. 

2. Requirement to consider monthly debtto-income ratio or residual income. Section 

1026.43(e)(2)(v)(A) does not prescribe 

specifically how a creditor must consider 

monthly debt-to-income ratio or residual 

income. Section 1026.43(e)(2)(v)(A) also does 

not prescribe a particular monthly debt-toincome ratio or residual income threshold 

with which a creditor must comply. A 

creditor may, for example, consider monthly 

debt-to-income ratio or residual income by 

establishing monthly debt-to-income or 

residual income thresholds for its own 

underwriting standards and documenting 

how it applied those thresholds to determine 

the consumer’s ability to repay. A creditor 

may also consider these factors by 

establishing monthly debt-to-income or 

residual income thresholds and exceptions to 

those thresholds based on other 

compensating factors, and documenting 

application of the thresholds along with any 

applicable exceptions. 

3. Flexibility to consider additional factors 

related to a consumer’s ability to repay. The 

requirement to consider income or assets, 

debt obligations, alimony, child support, and 

monthly debt-to-income ratio or residual 

income does not preclude the creditor from 

taking into account additional factors that are 

relevant in determining a consumer’s ability 

to repay the loan. For guidance on 

considering additional factors in determining 

the consumer’s ability to repay, see comment 

43(c)(7)–3. 

Paragraph 43(e)(2)(v)(B) 

1. Verification of income, assets, debt 

obligations, alimony, and child support. 

Section 1026.43(e)(2)(v)(B) does not prescribe 

specific methods of underwriting that 

creditors must use. Section 

1026.43(e)(2)(v)(B)(1) requires a creditor to 

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 in accordance with 

§ 1026.43(c)(4), which states that a creditor 

must verify such amounts using third-party 

records that provide reasonably reliable 

evidence of the consumer’s income or assets. 

Section 1026.43(e)(2)(v)(B)(2) requires a 

creditor to verify the consumer’s current debt 

obligations, alimony, and child support in 

accordance with § 1026.43(c)(3), which states 

that a creditor must verify such amounts 

using reasonably reliable third-party records. 

So long as a creditor complies with the 

provisions of § 1026.43(c)(3) with respect to 

debt obligations, alimony, and child support 

and § 1026.43(c)(4) with respect to income 

and assets, the creditor is permitted to use 

any reasonable verification methods and 

criteria. 

2. Classifying and counting income, assets, 

debt obligations, alimony, and child support. 

‘‘Current and reasonably expected income or 

assets other than the value of the dwelling 

(including any real property attached to the 

dwelling) that secures the loan’’ is 

determined in accordance with 

§ 1026.43(c)(2)(i) and its commentary. 

‘‘Current debt obligations, alimony, and child 

support’’ has the same meaning as under 

§ 1026.43(c)(2)(vi) and its commentary. 

Section 1026.43(c)(2)(i) and (vi) and the 

associated commentary apply to a creditor’s 

determination with respect to what inflows 

and property it may classify and count as 

income or assets and what obligations it must 

classify and count as debt obligations, 

alimony, and child support, pursuant to its 

compliance with § 1026.43(e)(2)(v)(B). 

3. Safe harbor for compliance with 

specified external standards. 

i. Meeting the standards in the following 

manuals for verifying current or reasonably 

expected income or assets using third-party 

records provides a creditor with reasonably 

reliable evidence of the consumer’s income 

or assets. Meeting the standards in the 

following manuals for verifying current debt 

obligations, alimony, and child support using 

third-party records provides a creditor with 

reasonably reliable evidence of the 

consumer’s debt obligations, alimony, and 

child support obligations. Accordingly, a 

creditor complies with § 1026.43(e)(2)(v)(B) if 

it complies with verification standards in one 

or more of the following manuals: 

A. Chapters B3–3 through B3–6 of the 

Fannie Mae Single Family Selling Guide, 

published June 3, 2020; 

B. Sections 5102 through 5500 of the 

Freddie Mac Single-Family Seller/Servicer 

Guide, published June 10, 2020; 

C. Sections II.A.1 and II.A.4–5 of the 

Federal Housing Administration’s Single 

Family Housing Policy Handbook, issued 

October 24, 2019; 

D. Chapter 4 of the U.S. Department of 

Veterans Affairs’ Lenders Handbook, revised 

February 22, 2019; 

E. Chapter 4 of the U.S. Department of 

Agriculture’s Field Office Handbook for the 

Direct Single Family Housing Program, 

revised March 15, 2019; and 

F. Chapters 9 through 11 of the U.S. 

Department of Agriculture’s Handbook for 

the Single Family Guaranteed Loan Program, 

revised March 19, 2020. 

ii. Applicable provisions in manuals. A 

creditor complies with § 1026.43(e)(2)(v)(B) if 

it complies with requirements in the manuals 

listed in comment 43(e)(2)(v)(B)–3 for 

creditors to verify income, assets, debt 

obligations, alimony and child support using 

specified reasonably reliable third-party 

documents or to include or exclude 

particular inflows, property, and obligations 

as income, assets, debt obligations, alimony, 

and child support. 

iii. Inapplicable provisions in manuals. For 

purposes of compliance with 

§ 1026.43(e)(2)(v)(B), a creditor need not 

comply with requirements in the manuals 

listed in comment 43(e)(2)(v)(B)–3 other than 

those that require creditors to verify income, 

assets, debt obligations, alimony and child 

support using specified documents or to 

classify and count particular inflows, 

property, and obligations as income, assets, 

debt obligations, alimony, and child support. 

iv. Revised versions of manuals. A creditor 

also complies with § 1026.43(e)(2)(v)(B) 

where it complies with revised versions of 

the manuals listed in comment 

43(e)(2)(v)(B)–3.i, provided that the two 

versions are substantially similar. 

v. Use of standards from more than one 

manual. A creditor complies with 

§ 1026.43(e)(2)(v)(B) if it complies with the 

verification standards in one or more of the 

manuals specified in comment 43(e)(2)(v)(B)– 

3.i. Accordingly, a creditor may, but need 


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Federal Register / Vol. 85, No. 249 / Tuesday, December 29, 2020 / Rules and Regulations 86397 

not, comply with § 1026.43(e)(2)(v)(B) by 

complying with the verification standards 

from more than one manual (in other words, 

by ‘‘mixing and matching’’ verification 

standards). 

Paragraph 43(e)(2)(vi) 

1. Determining the average prime offer rate 

for a comparable transaction as of the date 

the interest rate is set. For guidance on 

determining the average prime offer rate for 

a comparable transaction as of the date the 

interest rate is set, see comments 43(b)(4)–1 

through –3. 

2. Determination of applicable threshold. A 

creditor must determine the applicable 

threshold by determining which category the 

loan falls into based on the face amount of 

the note (the ‘‘loan amount’’ as defined in 

§ 1026.43(b)(5)). For example, for a first-lien 

covered transaction with a loan amount of 

$75,000, the loan would fall into the tier for 

loans greater than or equal to $66,156 

(indexed for inflation) but less than $110,260 

(indexed for inflation), for which the 

applicable threshold is 3.5 or more 

percentage points. 

3. Annual adjustment for inflation. The 

dollar amounts in § 1026.43(e)(2)(vi) will be 

adjusted annually on January 1 by the annual 

percentage change in the CPI–U that was in 

effect on the preceding June 1. The Bureau 

will publish adjustments after the June 

figures become available each year. 

4. Determining the annual percentage rate 

for certain loans for which the interest rate 

may or will change. 

i. In general. The commentary to 

§ 1026.17(c)(1) and other provisions in 

subpart C address how to determine the 

annual percentage rate disclosures for closedend credit transactions. Provisions in 

§ 1026.32(a)(3) address how to determine the 

annual percentage rate to determine coverage 

under § 1026.32(a)(1)(i). Section 

1026.43(e)(2)(vi) requires, for the purposes of 

§ 1026.43(e)(2)(vi), a different determination 

of the annual percentage rate for a qualified 

mortgage under § 1026.43(e)(2) for which the 

interest rate may or will change within the 

first five years after the date on which the 

first regular periodic payment will be due. 

An identical special rule for determining the 

annual percentage rate for such a loan also 

applies for purposes of § 1026.43(b)(4). 

ii. Loans for which the interest rate may or 

will change. Section 1026.43(e)(2)(vi) 

includes a special rule for determining the 

annual percentage rate for a loan for which 

the interest rate may or will change within 

the first five years after the date on which the 

first regular periodic payment will be due. 

This rule applies to adjustable-rate mortgages 

that have a fixed-rate period of five years or 

less and to step-rate mortgages for which the 

interest rate changes within that five-year 

period. 

iii. Maximum interest rate during the first 

five years. For a loan for which the interest 

rate may or will change within the first five 

years after the date on which the first regular 

periodic payment will be due, a creditor 

must treat the maximum interest rate that 

could apply at any time during that five-year 

period as the interest rate for the full term of 

the loan to determine the annual percentage 

rate for purposes of § 1026.43(e)(2)(vi), 

regardless of whether the maximum interest 

rate is reached at the first or subsequent 

adjustment during the five-year period. For 

additional instruction on how to determine 

the maximum interest rate during the first 

five years after the date on which the first 

regular periodic payment will be due, see 

comments 43(e)(2)(iv)–3 and –4. 

iv. Treatment of the maximum interest rate 

in determining the annual percentage rate. 

For a loan for which the interest rate may or 

will change within the first five years after 

the date on which the first regular periodic 

payment will be due, the creditor must 

determine the annual percentage rate for 

purposes of § 1026.43(e)(2)(vi) by treating the 

maximum interest rate that may apply within 

the first five years as the interest rate for the 

full term of the loan. For example, assume an 

adjustable-rate mortgage with a loan term of 

30 years and an initial discounted rate of 5.0 

percent that is fixed for the first three years. 

Assume that the maximum interest rate 

during the first five years after the date on 

which the first regular periodic payment will 

be due is 7.0 percent. Pursuant to 

§ 1026.43(e)(2)(vi), the creditor must 

determine the annual percentage rate based 

on an interest rate of 7.0 percent applied for 

the full 30-year loan term. 

5. Meaning of a manufactured home. For 

purposes of § 1026.43(e)(2)(vi)(D), 

manufactured home means any residential 

structure as defined under regulations of the 

U.S. Department of Housing and Urban 

Development (HUD) establishing 

manufactured home construction and safety 

standards (24 CFR 3280.2). Modular or other 

factory-built homes that do not meet the HUD 

code standards are not manufactured homes 

for purposes of § 1026.43(e)(2)(vi)(D). 

6. Scope of threshold for transactions 

secured by a manufactured home. The 

threshold in § 1026.43(e)(2)(vi)(D) applies to 

first-lien covered transactions less than 

$110,260 (indexed for inflation) that are 

secured by a manufactured home and land, 

or by a manufactured home only. 

* * * * * 

43(e)(4) Qualified Mortgage Defined—Other 

Agencies 

1. General. The Department of Housing and 

Urban Development, Department of Veterans 

Affairs, and the Department of Agriculture 

have promulgated definitions for qualified 

mortgages under mortgage programs they 

insure, guarantee, or provide under 

applicable law. Cross-references to those 

definitions are listed in § 1026.43(e)(4) to 

acknowledge the covered transactions 

covered by those definitions are qualified 

mortgages for purposes of this section. 

2. Mortgages for which the creditor 

received the consumer’s application prior to 

July 1, 2021. Covered transactions that met 

the requirements of § 1026.43(e)(2)(i) 

thorough (iii), were eligible for purchase or 

guarantee by the Federal National Mortgage 

Association (Fannie Mae) or the Federal 

Home Loan Mortgage Corporation (Freddie 

Mac) (or any limited-life regulatory entity 

succeeding the charter of either) operating 

under the conservatorship or receivership of 

the Federal Housing Finance Agency 

pursuant to section 1367 of the Federal 

Housing Enterprises Financial Safety and 

Soundness Act of 1992 (12 U.S.C. 4617), and 

for which the creditor received the 

consumer’s application prior to the 

mandatory compliance date of July 1, 2021 

continue to be qualified mortgages for the 

purposes of this section, including those 

covered transactions that were consummated 

on or after July 1, 2021. 

3. Mortgages for which the creditor 

received the consumer’s application on or 

after March 1, 2021 and prior to July 1, 2021. 

For a discussion of the optional early 

compliance period for the 2021 General QM 

Amendments, please see comment 43–2. 

4. [Reserved]. 

5. [Reserved]. 

* * * * * 

Paragraph 43(e)(5) 

1. Satisfaction of qualified mortgage 

requirements. For a covered transaction to be 

a qualified mortgage under § 1026.43(e)(5), 

the mortgage must satisfy the requirements 

for a qualified mortgage under 

§ 1026.43(e)(2), other than the requirements 

in § 1026.43(e)(2)(v) and (vi). For example, a 

qualified mortgage under § 1026.43(e)(5) may 

not have a loan term in excess of 30 years 

because longer terms are prohibited for 

qualified mortgages under § 1026.43(e)(2)(ii). 

Similarly, a qualified mortgage under 

§ 1026.43(e)(5) may not result in a balloon 

payment because § 1026.43(e)(2)(i)(C) 

provides that qualified mortgages may not 

have balloon payments except as provided 

under § 1026.43(f). However, a covered 

transaction need not comply with 

§ 1026.43(e)(2)(v) and (vi). 

2. Debt-to-income ratio or residual income. 

Section 1026.43(e)(5) does not prescribe a 

specific monthly debt-to-income ratio with 

which creditors must comply. Instead, 

creditors must consider a consumer’s debt-toincome ratio or residual income calculated 

generally in accordance with § 1026.43(c)(7) 

and verify the information used to calculate 

the debt-to-income ratio or residual income 

in accordance with § 1026.43(c)(3) and (4). 

However, § 1026.43(c)(7) refers creditors to 

§ 1026.43(c)(5) for instructions on calculating 

the payment on the covered transaction. 

Section 1026.43(c)(5) requires creditors to 

calculate the payment differently than 

§ 1026.43(e)(2)(iv). For purposes of the 

qualified mortgage definition in 

§ 1026.43(e)(5), creditors must base their 

calculation of the consumer’s debt-to-income 

ratio or residual income on the payment on 

the covered transaction calculated according 

to § 1026.43(e)(2)(iv) instead of according to 

§ 1026.43(c)(5). 

3. Forward commitments. A creditor may 

make a mortgage loan that will be transferred 

or sold to a purchaser pursuant to an 

agreement that has been entered into at or 

before the time the transaction is 

consummated. Such an agreement is 

sometimes known as a ‘‘forward 

commitment.’’ A mortgage that will be 

acquired by a purchaser pursuant to a 

forward commitment does not satisfy the 

requirements of § 1026.43(e)(5), whether the 

forward commitment provides for the 

purchase and sale of the specific transaction 


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or for the purchase and sale of transactions 

with certain prescribed criteria that the 

transaction meets. However, a forward 

commitment to another person that also 

meets the requirements of 

§ 1026.43(e)(5)(i)(D) is permitted. For 

example, assume a creditor that is eligible to 

make qualified mortgages under 

§ 1026.43(e)(5) makes a mortgage. If that 

mortgage meets the purchase criteria of an 

investor with which the creditor has an 

agreement to sell loans after consummation, 

then the loan does not meet the definition of 

a qualified mortgage under § 1026.43(e)(5). 

However, if the investor meets the 

requirements of § 1026.43(e)(5)(i)(D), the 

mortgage will be a qualified mortgage if all 

other applicable criteria also are satisfied. 

4. Creditor qualifications. To be eligible to 

make qualified mortgages under 

§ 1026.43(e)(5), a creditor must satisfy the 

requirements stated in § 1026.35(b)(2)(iii)(B) 

and (C). Section 1026.35(b)(2)(iii)(B) requires 

that, during the preceding calendar year, or, 

if the application for the transaction was 

received before April 1 of the current 

calendar year, during either of the two 

preceding calendar years, the creditor and its 

affiliates together extended no more than 

2,000 covered transactions, as defined by 

§ 1026.43(b)(1), secured by first liens, that 

were sold, assigned, or otherwise transferred 

to another person, or that were subject at the 

time of consummation to a commitment to be 

acquired by another person. Section 

1026.35(b)(2)(iii)(C) requires that, as of the 

preceding December 31st, or, if the 

application for the transaction was received 

before April 1 of the current calendar year, 

as of either of the two preceding December 

31sts, the creditor and its affiliates that 

regularly extended, during the applicable 

period, covered transactions, as defined by 

§ 1026.43(b)(1), secured by first liens, 

together, had total assets of less than $2 

billion, adjusted annually by the Bureau for 

inflation. 

5. Requirement to hold in portfolio. 

Creditors generally must hold a loan in 

portfolio to maintain the transaction’s status 

as a qualified mortgage under § 1026.43(e)(5), 

subject to four exceptions. Unless one of 

these exceptions applies, a loan is no longer 

a qualified mortgage under § 1026.43(e)(5) 

once legal title to the debt obligation is sold, 

assigned, or otherwise transferred to another 

person. Accordingly, unless one of the 

exceptions applies, the transferee could not 

benefit from the presumption of compliance 

for qualified mortgages under § 1026.43(e)(1) 

unless the loan also met the requirements of 

another qualified mortgage definition. 

6. Application to subsequent transferees. 

The exceptions contained in 

§ 1026.43(e)(5)(ii) 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 

qualified mortgage under § 1026.43(e)(5). Six 

months after consummation, Creditor A sells 

the qualified mortgage to Creditor B pursuant 

to § 1026.43(e)(5)(ii)(B) and the loan retains 

its qualified mortgage status because Creditor 

B complies with the limits on asset size and 

number of transactions. If Creditor B sells the 

qualified mortgage, it will lose its qualified 

mortgage status under § 1026.43(e)(5) unless 

the sale qualifies for one of the 

§ 1026.43(e)(5)(ii) exceptions for sales three 

or more years after consummation, to another 

qualifying institution, as required by 

supervisory action, or pursuant to a merger 

or acquisition. 

7. Transfer three years after 

consummation. Under § 1026.43(e)(5)(ii)(A), 

if a qualified mortgage under § 1026.43(e)(5) 

is sold, assigned, or otherwise transferred 

three years or more after consummation, the 

loan retains its status as a qualified mortgage 

under § 1026.43(e)(5) following the transfer. 

The transferee need not be eligible to 

originate qualified mortgages under 

§ 1026.43(e)(5). The loan will continue to be 

a qualified mortgage throughout its life, and 

the transferee, and any subsequent 

transferees, may invoke the presumption of 

compliance for qualified mortgages under 

§ 1026.43(e)(1). 

8. Transfer to another qualifying creditor. 

Under § 1026.43(e)(5)(ii)(B), a qualified 

mortgage under § 1026.43(e)(5) may be sold, 

assigned, or otherwise transferred at any time 

to another creditor that meets the 

requirements of § 1026.43(e)(5)(i)(D). That 

section requires that a creditor together with 

all its affiliates, extended no more than 2,000 

first-lien covered transactions that were sold, 

assigned, or otherwise transferred by the 

creditor or its affiliates to another person, or 

that were subject at the time of 

consummation to a commitment to be 

acquired by another person; and have, 

together with its affiliates that regularly 

extended covered transactions secured by 

first liens, total assets less than $2 billion (as 

adjusted for inflation). These tests are 

assessed based on transactions and assets 

from the calendar year preceding the current 

calendar year or from either of the two 

calendar years preceding the current calendar 

year if the application for the transaction was 

received before April 1 of the current 

calendar year. A qualified mortgage under 

§ 1026.43(e)(5) transferred to a creditor that 

meets these criteria would retain its qualified 

mortgage status even if it is transferred less 

than three years after consummation. 

9. Supervisory sales. Section 

1026.43(e)(5)(ii)(C) facilitates sales that are 

deemed necessary by supervisory agencies to 

revive troubled creditors and resolve failed 

creditors. A qualified mortgage under 

§ 1026.43(e)(5) retains its qualified mortgage 

status if it is sold, assigned, or otherwise 

transferred to another person 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. A qualified 

mortgage under § 1026.43(e)(5) that is sold, 

assigned, or otherwise transferred under 

these circumstances retains its qualified 

mortgage status regardless of how long after 

consummation it is sold and regardless of the 

size or other characteristics of the transferee. 

Section 1026.43(e)(5)(ii)(C) 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 

§ 1026.43(e)(5)(ii)(C) directing the sale of one 

or more qualified mortgages under 

§ 1026.43(e)(5) held by the creditor or one of 

the other circumstances listed in 

§ 1026.43(e)(5)(ii)(C). For example, a 

qualified mortgage under § 1026.43(e)(5) that 

is sold pursuant to a capital restoration plan 

under 12 U.S.C. 1831o would retain its status 

as a qualified mortgage following the sale. 

However, if the creditor simply chose to sell 

the same qualified mortgage as one way to 

comply with general regulatory capital 

requirements in the absence of supervisory 

action or agreement it would lose its status 

as a qualified mortgage following the sale 

unless it qualifies under another definition of 

qualified mortgage. 

10. Mergers and acquisitions. A qualified 

mortgage under § 1026.43(e)(5) retains its 

qualified mortgage status if a creditor merges 

with, is acquired by, or acquires another 

person regardless of whether the creditor or 

its successor is eligible to originate new 

qualified mortgages under § 1026.43(e)(5) 

after the merger or acquisition. However, the 

creditor or its successor can originate new 

qualified mortgages under § 1026.43(e)(5) 

only if it complies with all of the 

requirements of § 1026.43(e)(5) after the 

merger or acquisition. For example, assume 

a creditor that originates 250 covered 

transactions each year and originates 

qualified mortgages under § 1026.43(e)(5) is 

acquired by a larger creditor that originates 

10,000 covered transactions each year. 

Following the acquisition, the small creditor 

would no longer be able to originate 

§ 1026.43(e)(5) qualified mortgages because, 

together with its affiliates, it would originate 

more than 500 covered transactions each 

year. However, the § 1026.43(e)(5) qualified 

mortgages originated by the small creditor 

before the acquisition would retain their 

qualified mortgage status. 

* * * * * 

43(f)(1) Exemption 

Paragraph 43(f)(1)(i) 

1. Satisfaction of qualified mortgage 

requirements. Under § 1026.43(f)(1)(i), for a 

mortgage that provides for a balloon payment 

to be a qualified mortgage, the mortgage must 

satisfy the requirements for a qualified 

mortgage in paragraphs (e)(2)(i)(A), (e)(2)(ii), 

and (e)(2)(iii). Therefore, a covered 

transaction with balloon payment terms must 

provide for regular periodic payments that do 

not result in an increase of the principal 

balance, pursuant to § 1026.43(e)(2)(i)(A); 

must have a loan term that does not exceed 

30 years, pursuant to § 1026.43(e)(2)(ii); and 

must have total points and fees that do not 

exceed specified thresholds pursuant to 

§ 1026.43(e)(2)(iii). 

Paragraph 43(f)(1)(ii) 

1. Example. Under § 1026.43(f)(1)(ii), if a 

qualified mortgage provides for a balloon 

payment, the creditor must determine that 

the consumer is able to make all scheduled 

payments under the legal obligation other 


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than the balloon payment. For example, 

assume a loan in an amount of $200,000 that 

has a five-year loan term, but is amortized 

over 30 years. The loan agreement provides 

for a fixed interest rate of 6 percent. The loan 

consummates on March 3, 2014, and the 

monthly payment of principal and interest 

scheduled for the first five years is $1,199, 

with the first monthly payment due on April 

1, 2014. The balloon payment of $187,308 is 

required on the due date of the 60th monthly 

payment, which is April 1, 2019. The loan 

can be a qualified mortgage if the creditor 

underwrites the loan using the scheduled 

principal and interest payment of $1,199, 

plus the consumer’s monthly payment for all 

mortgage-related obligations, and satisfies the 

other criteria set forth in § 1026.43(f). 

2. Creditor’s determination. A creditor 

must determine that the consumer is able to 

make all scheduled payments other than the 

balloon payment to satisfy § 1026.43(f)(1)(ii), 

in accordance with the legal obligation, 

together with the consumer’s monthly 

payments for all mortgage-related obligations 

and excluding the balloon payment, to meet 

the repayment ability requirements of 

§ 1026.43(f)(1)(ii). A creditor satisfies 

§ 1026.43(f)(1)(ii) if it uses the maximum 

payment in the payment schedule, excluding 

any balloon payment, to determine if the 

consumer has the ability to make the 

scheduled payments. 

Paragraph 43(f)(1)(iii) 

1. Debt-to-income or residual income. A 

creditor must consider and verify the 

consumer’s monthly debt-to-income ratio or 

residual income to meet the requirements of 

§ 1026.43(f)(1)(iii)(C). To calculate the 

consumer’s monthly debt-to-income or 

residual income for purposes of 

§ 1026.43(f)(1)(iii)(C), the creditor may rely 

on the definitions and calculation rules in 

§ 1026.43(c)(7) and its accompanying 

commentary, except for the calculation rules 

for a consumer’s total monthly debt 

obligations (which is a component of debt-toincome and residual income under 

§ 1026.43(c)(7)). For purposes of calculating 

the consumer’s total monthly debt 

obligations under § 1026.43(f)(1)(iii), the 

creditor must calculate the monthly payment 

on the covered transaction using the payment 

calculation rules in § 1026.43(f)(1)(iv)(A), 

together with all mortgage-related obligations 

and excluding the balloon payment. 

Paragraph 43(f)(1)(iv) 

1. Scheduled payments. Under 

§ 1026.43(f)(1)(iv)(A), the legal obligation 

must provide that scheduled payments must 

be substantially equal and determined using 

an amortization period that does not exceed 

30 years. Balloon payments often result when 

the periodic payment would fully repay the 

loan amount only if made over some period 

that is longer than the loan term. For 

example, a loan term of 10 years with 

periodic payments based on an amortization 

period of 20 years would result in a balloon 

payment being due at the end of the loan 

term. Whatever the loan term, the 

amortization period used to determine the 

scheduled periodic payments that the 

consumer must pay under the terms of the 

legal obligation may not exceed 30 years. 

2. Substantially equal. The calculation of 

payments scheduled by the legal obligation 

under § 1026.43(f)(1)(iv)(A) are required to 

result in substantially equal amounts. This 

means that the scheduled payments need to 

be similar, but need not be equal. For further 

guidance on substantially equal payments, 

see comment 43(c)(5)(i)–4. 

3. Interest-only payments. A mortgage that 

only requires the payment of accrued interest 

each month does not meet the requirements 

of § 1026.43(f)(1)(iv)(A). 

Paragraph 43(f)(1)(v) 

1. Forward commitments. A creditor may 

make a mortgage loan that will be transferred 

or sold to a purchaser pursuant to an 

agreement that has been entered into at or 

before the time the transaction is 

consummated. Such an agreement is 

sometimes known as a ‘‘forward 

commitment.’’ A balloon-payment mortgage 

that will be acquired by a purchaser pursuant 

to a forward commitment does not satisfy the 

requirements of § 1026.43(f)(1)(v), whether 

the forward commitment provides for the 

purchase and sale of the specific transaction 

or for the purchase and sale of transactions 

with certain prescribed criteria that the 

transaction meets. However, a purchase and 

sale of a balloon-payment qualified mortgage 

to another person that separately meets the 

requirements of § 1026.43(f)(1)(vi) is 

permitted. For example: Assume a creditor 

that meets the requirements of 

§ 1026.43(f)(1)(vi) makes a balloon-payment 

mortgage that meets the requirements of 

§ 1026.43(f)(1)(i) through (iv); if the balloonpayment mortgage meets the purchase 

criteria of an investor with which the creditor 

has an agreement to sell such loans after 

consummation, then the balloon-payment 

mortgage does not meet the definition of a 

qualified mortgage in accordance with 

§ 1026.43(f)(1)(v). However, if the investor 

meets the requirement of § 1026.43(f)(1)(vi), 

the balloon-payment qualified mortgage 

retains its qualified mortgage status. 

Paragraph 43(f)(1)(vi) 

1. Creditor qualifications. Under 

§ 1026.43(f)(1)(vi), to make a qualified 

mortgage that provides for a balloon 

payment, the creditor must satisfy three 

criteria that are also required under 

§ 1026.35(b)(2)(iii)(A), (B) and (C), which 

require: 

i. During the preceding calendar year or 

during either of the two preceding calendar 

years if the application for the transaction 

was received before April 1 of the current 

calendar year, the creditor extended a firstlien covered transaction, as defined in 

§ 1026.43(b)(1), on a property that is located 

in an area that is designated either ‘‘rural’’ or 

‘‘underserved,’’ as defined in 

§ 1026.35(b)(2)(iv), to satisfy the requirement 

of § 1026.35(b)(2)(iii)(A) (the rural-orunderserved test). Pursuant to 

§ 1026.35(b)(2)(iv), an area is considered to 

be rural if it is: A county that is neither in 

a metropolitan statistical area, nor a 

micropolitan statistical area adjacent to a 

metropolitan statistical area, as those terms 

are defined by the U.S. Office of Management 

and Budget; a census block that is not in an 

urban area, as defined by the U.S. Census 

Bureau using the latest decennial census of 

the United States; or a county or a census 

block that has been designated as ‘‘rural’’ by 

the Bureau pursuant to the application 

process established in 2016. See Application 

Process for Designation of Rural Area under 

Federal Consumer Financial Law; Procedural 

Rule, 81 FR 11099 (Mar. 3, 2016). An area is 

considered to be underserved during a 

calendar year if, according to HMDA data for 

the preceding calendar year, it is a county in 

which no more than two creditors extended 

covered transactions secured by first liens on 

properties in the county five or more times. 

A. The Bureau determines annually which 

counties in the United States are rural or 

underserved as defined by 

§ 1026.35(b)(2)(iv)(A)(1) or 

§ 1026.35(b)(2)(iv)(B) and publishes on its 

public website lists of those counties to assist 

creditors in determining whether they meet 

the criterion at § 1026.35(b)(2)(iii)(A). 

Creditors may also use an automated tool 

provided on the Bureau’s public website to 

determine whether specific properties are 

located in areas that qualify as ‘‘rural’’ or 

‘‘underserved’’ according to the definitions in 

§ 1026.35(b)(2)(iv) for a particular calendar 

year. In addition, the U.S. Census Bureau 

may also provide on its public website an 

automated address search tool that 

specifically indicates if a property address is 

located in an urban area for purposes of the 

Census Bureau’s most recent delineation of 

urban areas. For any calendar year that 

begins after the date on which the Census 

Bureau announced its most recent 

delineation of urban areas, a property is 

located in an area that qualifies as ‘‘rural’’ 

according to the definitions in 

§ 1026.35(b)(2)(iv) if the search results 

provided for the property by any such 

automated address search tool available on 

the Census Bureau’s public website do not 

identify the property as being in an urban 

area. A property is also located in an area 

that qualifies as ‘‘rural,’’ if the Bureau has 

designated that area as rural under 

§ 1026.35(b)(2)(iv)(A)(3) and published that 

determination in the Federal Register. See 

Application Process for Designation of Rural 

Area under Federal Consumer Financial Law; 

Procedural Rule, 81 FR 11099 (Mar. 3, 2016). 

B. For example, if a creditor extended 

during 2017 a first-lien covered transaction 

that is secured by a property that is located 

in an area that meets the definition of rural 

or underserved under § 1026.35(b)(2)(iv), the 

creditor meets this element of the exception 

for any transaction consummated during 

2018. 

C. Alternatively, if the creditor did not 

extend in 2017 a transaction that meets the 

definition of rural or underserved test under 

§ 1026.35(b)(2)(iv), the creditor satisfies this 

criterion for any transaction consummated 

during 2018 for which it received the 

application before April 1, 2018, if it 

extended during 2016 a first-lien covered 

transaction that is secured by a property that 

is located in an area that meets the definition 

of rural or underserved under 

§ 1026.35(b)(2)(iv). 

ii. During the preceding calendar year, or, 

if the application for the transaction was 


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received before April 1 of the current 

calendar year, during either of the two 

preceding calendar years, the creditor 

together with its affiliates extended no more 

than 2,000 covered transactions, as defined 

by § 1026.43(b)(1), secured by first liens, that 

were sold, assigned, or otherwise transferred 

to another person, or that were subject at the 

time of consummation to a commitment to be 

acquired by another person, to satisfy the 

requirement of § 1026.35(b)(2)(iii)(B). 

iii. As of the preceding December 31st, or, 

if the application for the transaction was 

received before April 1 of the current 

calendar year, as of either of the two 

preceding December 31sts, the creditor and 

its affiliates that regularly extended covered 

transactions secured by first liens, together, 

had total assets that do not exceed the 

applicable asset threshold established by the 

Bureau, to satisfy the requirement of 

§ 1026.35(b)(2)(iii)(C). The Bureau publishes 

notice of the asset threshold each year by 

amending comment 35(b)(2)(iii)–1.iii. 

Dated: December 10, 2020. 

Grace Feola, 

Federal Register Liaison, Bureau of Consumer 

Financial Protection. 

[FR Doc. 2020–27567 Filed 12–21–20; 4:15 pm] 

BILLING CODE 4810–AM–P 


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