Four of the largest mortgage lenders in the country are leading a coalition that is calling on the Consumer Financial Protection Bureau to make to changes to the Ability to Repay/Qualified Mortgage rule.
Specifically, the group, which includes Bank of America, Quicken Loans, Wells Fargo, and Caliber Home Loans, wants the CFPB to do away with the QM rule’s debt-to-income ratio requirement.
The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them the money.
The rule also includes a stipulation that a borrower’s monthly debt-to-income ratio cannot exceed 43%, but that condition does not apply to loans backed by the government (Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture).
Additionally, Fannie Mae and Freddie Mac are not bound this requirement either, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie or Freddie are allowed to exceed to the 43% DTI ratio.
But some in the mortgage industry, including Federal Housing Finance Agency Director Mark Calabria, believe that the QM Patch gave Fannie and Freddie an unfair advantage because loans sold to them did not have to play by the same rules as loans backed by private capital.
But the QM Patch is due to expire in 2021, and earlier this year, the CFPB moved to officially do away with the QM Patch on its stated expiration date.
And now, a group of four of the 10 largest lenders in the country are joining with some sizable trade and special interest groups to call on the CFPB to make changes to the QM rule in conjunction with allowing the QM Patch to expire.
This week, Wells Fargo, Bank of America, Quicken Loans, and Caliber Home Loans joined with the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, and others to send a letter to the CFPB, asking the bureau to eliminate the 43% DTI cap on “prime and near-prime loans.”
As the group states, a recent analysis by CoreLogic’s Pete Carroll showed that the QM patch accounted for 16% of all mortgage originations in 2018, comprising $260 billion in loans.
But the group notes that the QM Patch (or GSE Patch, as they groups refer to it as in their letter) has limited borrowers’ options for getting a mortgage. And the group believes that removing the DTI cap will allow for a responsible expansion of lending practices.
The group writes:
The GSE Patch has provided an alternative to the DTI ratio threshold, as well as relief from the rigid requirements for verifying and calculating income, assets, and debts for DTI ratios under Appendix Q for non-W-2 wage earners. The GSE Patch has facilitated access to homeownership for approximately 3.3 million creditworthy borrowers who collectively represent nearly 20 percent of the loans guaranteed by the GSEs over the last 5 years.
Moreover, analysts estimate that roughly $260 billion (within a range of $200-320 billion) of 2018 total mortgage loan origination volume met the QM definition under the GSE Patch. But lending outside of the Patch and the Federal Housing Administration channel has been limited largely because of the difficulty of complying with QM’s hard DTI cap and the related requirements of Appendix Q, while the Patch has provided the regulatory certainty that was far more attractive to lenders.
After the Patch expires, the best way to enable fair market competition across all lending channels while also ensuring that these creditworthy individuals can be served in a safe and sound manner under the existing ATR-QM framework is to eliminate the DTI ratio for prime and near-prime loans and with it Appendix Q.
As MBA President and CEO Robert Broeksmit recently argued in an article for HousingWire’s Pulse, there may be alternative methods for determining a borrower’s creditworthiness beyond a strict DTI metric.
“With respect to the 43% DTI threshold, it makes little sense to commit to a rigid requirement that does not account for the complexities of underwriting. Instead, we should focus on alternatives, like permitting the use of compensating factors or implementing a residual income test,” Broeksmit wrote. “Allowing for this flexibility will ensure that lower-income borrowers and minorities are better able to participate in the home-buying process, without introducing undue risk to the system.”
Outside of eliminating the DTI ratio requirement and the associated Appendix Q, the group does not believe any other changes to the QM rule are necessary. The groups state that they want the CFPB to:
- Maintain and enhance the existing ATR regulatory language
- Maintain the existing QM statutory safe product restrictions that prohibit certain risky loan features (e.g., no terms over 30 years, no negative amortization, no interest-only payments, no balloon payments, documented and verified income, etc.) and clarify provisions related to documentation and verification of income.
“Today, all mortgage loans must be underwritten in accordance with the ATR statute. This requirement should continue to be the bedrock of compliance, and nothing we are proposing would change that reality. We believe that consumers and creditors alike would also benefit from further clear guidance in the future on the ATR statutory underwriting requirements, including that creditor underwriting practices aimed at ‘equity stripping’ and collateral-based lending is expressly prohibited,” the group writes.
“The Safe Harbor measure reinforces the underwriting mandate by assuring that only loans priced as low-credit-risk transactions receive the strongest protections from legal liability,” the group continues. “The Bureau’s own assessment of the ATR-QM rule indicated the influence of this feature on creditors’ lending activities. The coalition commends the CFPB for crafting this regulatory framework, which created not only a solid foundation for sound underwriting, but also a compelling incentive for creditors to originate QM loans.”
Removing the DTI cap would also enable the mortgage lending industry to both keep up with the country’s shifting demographics and ensure lending is increased to underserved communities, as a recent study by Urban Institute pointed out that the QM patch disproportionally serves minority and low-income borrowers, who would not qualify for a loan without its less restrictive standards.
“Elimination of the DTI requirement for prime and near-prime loans would preserve access to sustainable credit for the new generation of first-time homebuyers in a safe and sustainable way and in accordance with the fundamental ATR requirements,” the group writes.
“This change is especially important for reaching historically underserved borrowers, including low- to moderate-income households, and communities of color,” the group continues. “By retaining the most effective aspects of the ATR-QM rule, including the core underwriting and documentation/verification requirements of ATR and the QM product feature restrictions, we believe the Bureau can act to counter the effects of systemic headwinds that face both first-time and repeat homebuyers and facilitate the responsible and steady emergence of this new generation into homeownership.”
The group also claims that DTI ratio on its own is not a reliable indicator of a person’s ability to repay their mortgage.
“A DTI ratio is not intended to be a stand-alone measure of credit risk and, on its own, is widely recognized as a weak predictor of default and one’s ability to repay,” the group writes. “DTI ratios must be considered within the context of a full set of risk factors used to underwrite the loan. These risk factors are weighed and balanced against one another to provide the creditor with a comprehensive view of the borrower’s financial profile.”
In conclusion, the group states that it believes its ideas “can help the Bureau craft a forward-thinking QM definition that embraces the technological advances and innovation in the mortgage finance industry.”
The letter is signed by the American Bankers Association, Asian Real Estate Association of America, Bank of America, Bank Policy Institute, Caliber Home Loans, Consumer Bankers Association, Center for Responsible Lending, Credit Union National Association, Housing Policy Council, The Leadership Conference, Mortgage Bankers Association, Manufactured Housing Institute, NAACP, the National Association of Hispanic Real Estate Professionals, National Association of Real Estate Brokers, National Community Reinvestment Coalition, National Council of State Housing Agencies, National Fair Housing Alliance, National Housing Conference, National Housing Resource Center, PNC, Quicken Loans, and Wells Fargo.