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Ballard Spahr’s Andreano: CFPB is open to “other approaches” to QM

Will a requirement without a benchmark still provide lenders with a safe harbor?

HousingWire sat down with Richard Andreano, a partner at Ballard Spahr in Washington, D.C., and co-leader of the law firm’s mortgage practice group, to talk about regulatory proposals being considered by the Consumer Financial Protection Bureau.

Q: What developments at the CFPB should the mortgage industry be watching?
A: Probably among them is the Ability to Repay, Qualified Mortgage proposals. They’re centering on – there’s been a desire to move away from the so-called GSE Patch QM which is the Qualified Mortgage for loans that are held for sale to Fannie Mae and Freddie Mac that is scheduled for sunset on Jan. 10, 2021. Also, there is the criticism of the general QM that was put into the reg that had the strict 43% debt-to-income ratio benchmark.

There are two proposals that came out in June. One was, because January is not that far off, to propose the extension of the GSE Patch to coincide with the adoption of whatever they adopt for a revised general Qualified Mortgage. The comment period for that has ended, and I expect to see action on that probably relatively soon because the closer we get to Jan. 10, there will be more uncertainty in the marketplace and I think they want to avoid that. So I would expect in the near term they will come forward with a final rule extending the patch.

Q: What about the other proposals?
A: What they decided to do was remove the existing QM, the 43% debt-to-income ratio in Appendix Q, and come up with a proposal that would basically be tied in large part to the price of a loan – using market approaches to loan pricing, which in theory reflects risk. Basically, loans that were below certain price levels, and they would use the annual percentage rate as the benchmark for that, so that it would come up with different rates based on whether it was a first-lien loan and the size of the loan or a second loan, and the size of the loan. But there would be other factors. All the product limitations that currently apply to a Qualified Mortgage would still apply, so it would have to be a 30-year maximum – no interest-only, no negative amortization.

There’s a part of the proposal, too, that the Bureau still would require the creditor to consider the debt-to-income ratio or residual income, but it didn’t provide any benchmark or guidance as to how you would assess what was an appropriate debt-to-income ratio and what was sufficient residual income. So I think the comments that the industry is going to make will be: If your purpose of the QM is to provide a safe harbor and if you insert in the QM a requirement without benchmarks, you just defeated the purpose of the safe harbor. I think the industry will focus on that.

Now, the bureau did, in its proposal, ask for comments on whether it should specify a specific debt-to-income ratio or not. So it did seek comment on that, and it did seek comment on whether there are other approaches. So it’s open to adopting something different from what it proposed.

Q: There’s a presidential election looming. How might that impact the CFPB?
A: Another factor we have to consider in all this is: There could be a new CFPB director coming in. Obviously, a new director may have a different vision and decide to go on a different path than the current director. As to whether they would just let the patch sunset and keep the existing QM, probably not because of the dislike of the existing QM, the strict 43% one, is shared by both the industry and consumer groups. Both the industry and consumer groups support change. If the current director is there or you have a new director, I think you have a general dislike with the existing standard Qualified Mortgage, so there’s lots to be determined there. It’s a weighty issue because if you get it wrong, it could really constrain credit.

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