CFPB Releases Factsheet for Calculating Prepaid Interest Under General QM Rule

On February 23, 2022, the Consumer Financial Protection Bureau (“CFPB”) released a factsheet regarding the interest rate used to calculate prepaid interest for adjustable-rate mortgages (“ARMs”) and step-rate loans under the price-based General Qualified Mortgage (“QM”) rule. 

The General Qualified Mortgage Final Rule, which took effect on March 1, 2021, includes a “price-based General QM definition.” The definitions states that a loan’s APR cannot exceed the average prime offer rate (“APOR”) for a comparable transaction by the amounts set forth in the Rule as of the date the interest rate is set [12 CFR 1026.43(e)(2)(vi)]. Generally, the threshold amount is 2.25 percentage points, but the rule provides higher thresholds for smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions. Additionally, if a loan’s rate can change within the first five years after the date on which the first regular periodic payment will be due, the maximum interest rate that may apply during the five-year period must be used in the APR calculation for purposes of price-based General QM rule.

The fact sheet provides examples of how prepaid interest, also referred to as “per diem” interest, is generally paid in arrears and included in APR calculations under Regulation Z.   For ARMs and step-rate loans, the fact sheet states that the maximum interest rate that can be applied during the five-year period after the date on which the first periodic payment will be due must also be used to calculate prepaid interest and negative prepaid interest as part of the APR calculation under the price-based General QM definition. 

To view the CFPB Factsheet for additional information, click here.

DocMagic is reviewing the updated information and will advise on any changes that are necessary to our calculation of the APR based on the highest rate achieved in the introductory period, which is used in the QM Price-Based Limit test.

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• U.S. Treasury and FHFA suspend provisions of the PSPAs (10/20/2021)