CFPB considering alternative to 43% DTI ratio under QM

Mortgage industry representatives and analysts pushed back against the use of a hard debt-to-income ratio in the expanded comment period window for the Qualified Mortgage rule.

The Consumer Financial Protection Bureau delayed the rule, which many lenders believe will govern the entire mortgage market. Many provisions in the early proposal are controversial, including a possible rebuttable presumption clause that lenders fear could open them up to more litigation risk.

But the proposal also has hard benchmarks lenders must reach when determining if a borrower has the ability to repay the home loan. Concern over these numbers sparked the agency to delay the rule and accept more analysis. Both industry groups and consumer advocates are concerned borrowers may be unecessarily shut out.

“It should also be noted that a consumers ‘willingness to repay’ cannot be measured,” John Hudson, chairman for National Association of Mortgage Brokers, told a House subcommittee Wednesday.

One approach the CFPB is considering embeds a 43% debt-to-income ratio limit, meaning if a borrower’s total debt payments with the mortgage payments are more than 43% of his or her monthly income, the lender must put the borrower through “a waterfall” of alternative criteria.

Eric Stein, senior vice president at the Center for Responsible Lending, took part in a clearinghouse that developed some of the alternatives and pitched them to the CFPB.

“We set a backend DTI as the baseline at 43%, which is (the Federal Housing Administration‘s) manual underwriting. Anybody under 43% would be QM but we recognized that there are a lot of borrowers who can afford a 43% DTI and should be the safe type of home loan,” Stein told the committee. “So we added a lot of other factors that lenders have used historically, such as if you have reserves, if your new loan doesn’t cost more than your old loan that you successfully paid on. If any of those are true you could also become a QM.”

The Mortgage Bankers Association looked at Federal Housing Finance Agency data from 1997 through 2009. According to the findings, roughly 23% of the loans bought by Fannie Mae and Freddie Mac had DTIs greater than 43%.

“Based on the FHFA data, there is no reason to choose 43, 44 or even 46 as a default standard. Loan performance and ability to repay does not markedly change at any of these points,” said Debra Still, chairman of the Mortgage Bankers Association.

Hudson provided 60-day delinquency dates on a variety of DTI scores. (Click the graph below to expand.) In a given year, increasing the DTI by 1 percentage point usually increased the delinquency by just a percentage point as well.

“The bottom line is that the entire mortgage industry is already adhering to the general ability to repay standards,” Hudson said. “It will be unfortunate to both consumers and industry alike should the CFPB create a one-size-fits-all underwriting standard with relation to DTI ratios, assets, employment, etc.”


3d rendering of a row of luxury townhouses along a street

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