A phase-in of new rules for underwriting standards for so-called “qualified mortgages” means lenders can keep using the old rules until next year when they’re originating loans they don’t intend to sell to Fannie Mae or Freddie Mac.
But if they want to originate mortgages that qualify for purchase or guarantee by Fannie and Freddie, lenders will need to follow the new “general QM” rule. Luckily the latest update to ICE Mortgage Technology’s Encompass loan origination system, release 21.2, gives lenders the flexibility to use either the old role or the new one, depending on who they’re originating the loan for.
The update “further highlights our commitment to leveraging our technology, data and industry expertise to help our clients and partners navigate the ever changing lending landscape,” said Joe Tyrrell, president of ICE Mortgage Technology, in a statement.
Lenders who meet the general QM rule are granted a legal “safe harbor” from lawsuits by borrowers, which makes it easier to bundle qualified mortgages into mortgage backed securities that are sold to investors.
The original qualified mortgage rule was adopted in 2014 in the aftermath of the 2007-08 mortgage meltdown to discourage lenders from providing risky loans. One way the original rule accomplished that was to limit each borrower’s debt-to-income ratio to 43 percent. Fannie and Freddie were granted an exemption (the “QM patch”) that allowed them to exceed that limit.
To encourage more competition between lenders, the Consumer Financial Protection Bureau revamped the general QM rule by doing away with the 43 percent DTI cap, and replacing it with a price-based approach. Loans can be considered qualified mortgages if they don’t exceed limits points and fees, and charge interest rates that are within 225 basis points of the average prime offer rate.
Lenders have been allowed to use the new general QM rule since March 1, and it was slated to become mandatory on July 1. But the CFPB has pushed mandatory compliance back to Oct. 1, 2022.
Fannie Mae and Freddie Mac announced in April that they would stick to the original timetable. For applications received after July 1, and for all mortgages with settlement dates after Aug. 31, Fannie and Freddie will use the new price-based general QM rule.