On October 20, 2020, the Consumer Financial Protection Bureau (CFPB) issued a final rule extending the sunset date for the GSE Patch (the “Final Rule”). Under the Final Rule, the GSE Patch will expire on the earlier of (1) the mandatory compliance date of the final rule amending the General QM loan definition, or (2) the date that the GSEs exit conservatorship.1
The Final Rule contains two substantive modifications from the CFPB’s proposed rule, summarized below. It will take effect 30 days after publication in the Federal Register.
Background on the GSE Patch Sunset
As discussed in additional detail in a previous client alert, the Temporary QM category (also known as the GSE Patch) affords QM status to loans that are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac. When the ATR/QM Rule was implemented, the GSE Patch was set to expire on the earlier of (1) January 10, 2021, or (2) the date that the GSEs exit conservatorship. On June 22, 2020, the CFPB issued a proposed rulemaking that would extend the GSE Patch until the effective date of a final rule that would update the General QM loan definition (the “Proposed Rule”), which the CFPB does not expect to be prior to April 1, 2021.2 The comment period to the Proposed Rule expired on August 10, 2020.
Summary of Final Rule
According to the CFPB, all of the comments it received to the Proposed Rule supported extending the GSE Patch. However, the Final Rule contains two substantive modifications, and the CFPB also addresses why it is declining to implement certain changes requested by commenters.
- Implementation Period. Under the Final Rule, the Temporary QM category is available for a loan if the creditor receives the consumer’s application before the mandatory compliance date of a final rule amending the General QM loan definition. The Final Rule links the expiration of the GSE Patch to the “mandatory compliance date of a final rule” amending the General QM loan definition instead of to the “effective date of a final rule,” as originally proposed. The CFPB explains that, after considering the comments it received with respect to its General QM loan rulemaking, it “intends to establish an implementation period—i.e., the time period after such a final rule is issued and before creditors are required to transition from the current General QM loan definition to the revised General QM loan definition—that provides the amount of time necessary to facilitate a smooth and orderly transition to a revised General QM loan definition.”
The CFPB further indicated that it may adopt an “optional early compliance period” to accommodate creditors that are able to, and wish to start using, the revised General QM loan definition earlier than the mandatory compliance date. If an optional early compliance period is adopted, the revised General QM loan definition would become available on the “effective date” of that final rule, would coexist with the current General QM loan definition for a period of time, and then the current General QM loan definition would expire on the final rule’s “mandatory compliance date.” If no early compliance period is adopted, the “effective date” and “mandatory compliance date” will be the same date.
Because it plans to establish an implementation period, the CFPB declined to adopt an “overlap period” in which the GSE Patch is kept in effect after the date creditors are required to transition to the new General QM loan definition.
- Closing the Coverage Gap & Definition of “Application.” As proposed, the sunset provisions would result in a gap in coverage for borrowers that apply for a loan prior to the effective date of the new General QM loan definition but whose loans close after the GSE Patch has expired. To address this, the GSE Patch will be available for covered transactions “for which the creditor receives the consumer’s application before” the mandatory compliance date with the General QM amendment instead of for covered transactions “consummated on or before” the effective date of the General QM amendment, as proposed.
Regulation Z contains two definitions of “application” – a general definition and a more specific definition for loans subject to TRID. The Proposed Rule did not define “application” for purposes of the sunset provisions. The Final Rule adds a new comment providing that for loans subject to TRID, the TRID definition of “application” will apply. For loans not subject to TRID, creditors may use either the TRID definition of application or the more general Regulation Z definition.
- Conservatorship Clause. The CFPB did not propose to eliminate the conservatorship clause but received comments calling for its elimination. In the Final Rule, the CFPB again declined to eliminate the conservatorship clause because of concern “…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, if the GSEs are not under conservatorship.” While the CFPB expects that the conservatorships will remain in place until the GSE Patch expires, if it appears that a final rule amending the General QM loan definition will not be in effect at the time the conservatorship of one or both of the GSEs is terminated, the CFPB will evaluate at that point what, if any, steps should be taken in response to such a termination of conservatorship.
- Other Rulemakings. While the CFPB indicated that it plans to establish an implementation period, and is considering an optional early compliance period, for its final rule amending the General QM loan definition, the Final Rule does not otherwise address this rulemaking or the Seasoned QM rulemaking. The CFPB indicated that it would address those proposed amendments at a later time. The CFPB also indicated that “in the unlikely event” that a final rule amending the General QM loan definition is not finalized and the current definition remains in place, it would “revisit the Temporary GSE QM loan definition and take appropriate action,” since it does not intend to maintain the GSE Patch indefinitely.
 The Final Rule is available at: https://www.consumerfinance.gov/documents/9259/cfpb_atr-qm-patch-extension-final-rule_2020-10.pdf.
 On June 22, 2020, the CFPB also issued a separate proposed rule to amend the General QM loan definition by replacing the 43% DTI limit with a price-based approach and remove Appendix Q. On August 18, 2020, it issued a proposed rule to introduce a new “Seasoned QM” category.