CFPB Releases Prepaid Interest Fact Sheet for Certain QM Loan APR Calculations | Ballard Spahr LLP

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The CFPB recently published a fact sheet discuss how prepaid interest, also referred to as daily interest, is factored into the calculation of the annual percentage rate (APR) for certain adjustable rate mortgages (ARMs) and tiered rate loans for purposes of Assessing Qualifying Mortgage (QM) Status under the Revised General Quality Management Rule. The advice provided by the CFPB seems more suited to a rule than to a sheet.

Like before reported in December 2020, the CFPB issued a final rule to replace the initial general QM based on a strict debt-to-income ratio (DTI) of 43% with a revised general QM based on a pricing construct. For most mortgages, the loan qualifies as a QM under the Revised General Approach to QM if it meets the product restrictions and applicable point and fee limit, and has an APR that does not exceed the average prime bid rate (a market-based interest rate) of 2.25 percentage points or more. (Higher thresholds apply to lower balance loans and junior senior loans.) The revised General QM essentially replaces the APR limit for the DTI limit. Additionally, as previously reported, the CFPB has subsequently extended the mandatory compliance date for the revised General MQ from July 1, 2021 to October 1, 2022. For applications received before October 1, 2022, the original General MQ and the MQ Revised General are available. . For requests received on or after October 1, 2022, only the revised general MQ remains available.

For an ARM loan or step-rate loan that provides for an interest rate increase during the five-year period following the first scheduled payment due on the loan, the actual APR used for disclosure purposes is not used to determine if the APR on the loan is below the applicable threshold to qualify as a QM loan. Rather, the APR for these purposes should be calculated as if the highest interest rate that could apply during that five-year period were in effect for the full term of the loan. In the fact sheet, the CFPB explains how prepaid interest is factored into the special APR calculation.

The CFPB notes in the sheet that interest on mortgage loans is paid in arrears. For example, for a monthly mortgage payment due November 1, the payment will include interest accrued in October. The CFPB also discusses two approaches used in the industry to deal with interest accrued in the month a loan is closed. Using an example of a loan that closes on September 20 with an initial payment due on November 1, the CFPB indicates that the consumer will generally pay at closing prepaid interest for the 11 days in September during which interest will accrue. Conversely, using an example of a loan that closes on October 4 with an initial payment due on November 1, the CFPB indicates that the lender will generally credit the consumer for three days of interest, stating that the loan was not not underway until October 4.

Whether the consumer pays prepaid interest or the creditor extends the consumer an interest credit, the payment or the credit is included in the determination of the APR. In the information sheet, the CFPB indicates which interest rate is used for the calculation of the special APR for an ARM loan or a graduated rate loan which provides for an increase in the interest rate during the five-year period. following the first scheduled payment due on the loan. The CFPB advises the following:

For the purposes of calculating the APR for the General QM ARMs special rule, the maximum interest rate that may apply during the five-year period following the date on which the first regular periodic payment is due is used to calculate the interest. prepaid and negative prepaid interest. . For example, if Ficus Bank originates an ARM that has an interest rate of 2.5% in years 1-3 and 4.5% for the remainder of the loan term, Ficus Bank must use 4.5% as the interest rate to determine if the loan meets the general price-based QM definition, including for calculation
any prepaid interest or negative prepaid interest in calculating the APR. A creditor must use the maximum interest rate for the first five years to calculate the APR for the purposes of the
special rule, even if the creditor will use a different rate for the calculation of the prepaid interest due to consumption.

Thus, for applicable ARM loans or tiered rate loans, for the purpose of the special APR calculation used to determine QM status, the actual charge or credit for prepaid interest based on the original interest rate n is not used. Instead, the highest rate that can apply during the initial five-year period is used. The CFPB provided no explanation for the use of this rate and not the initial interest rate, which is the rate used to determine the actual prepaid interest charge or credit at closing. Also, as noted above, the guidance seems more suited to developing rules than a fact sheet.

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