Mortgage

CFPB planning to eliminate DTI requirement from QM lending rules

CFPB director tells Congress that QM Patch will likely be extended

Over the last several months, a number of the nation’s largest lenders and housing trade groups have called on the Consumer Financial Protection Bureau to make changes to the Ability to Repay/Qualified Mortgage rule.

More specifically, Bank of AmericaQuicken Loans, Wells Fargo, Caliber Home Loans, along with the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, and others asked the CFPB to do away with the QM rule’s debt-to-income ratio requirement.

And now, it looks like they’re going to get their wish.

In a letter sent last week to several prominent members of Congress, CFPB Director Kathy Kraninger said the bureau has decided to propose an amendment to the QM Rule that would “move away” from DTI as a factor in mortgage underwriting.

Specifically, Kraninger said the CFPB has decided to shift from the DTI standard and move to an “alternative, such as a pricing threshold (i.e., the difference between the loan’s annual percentage rate and the average prime offer rate for a comparable transaction.”

According to Kraninger, the proposed alternative would be “intended to better ensure that responsible, affordable mortgage credit remains available to consumers.”

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 money.

This includes a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43%.

But, Fannie Mae and Freddie Mac are not bound to this requirement, 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.

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.

The QM Patch is due to expire in January 2021, and last year the CFPB moved to officially do away with the QM Patch on its stated expiration date.

But, just like the DTI standard, that may not be the case anymore either.

According to Kraninger, the CFPB is also considering extending the deadline for the expiration of the QM Patch, thereby extending the special rules that Fannie and Freddie play by for an undetermined period of time.

Kraninger made the declarations in a letter sent last week to Sen. Mark Warner, D-VA.

In the letter, Kraninger said that the bureau “expects to propose” expiration of the QM Patch rule “for a short period.” However, Kraninger does not define how long that “short period” of time would be for.

Rather, Kraninger states that the GSE Patch would be extended “until the effective date of the proposed alternative or until one or more of the GSEs exit conservatorship, whichever comes first.”

According to Kraninger’s letter, the CFPB expects to issue a new rule on the matter “no later than” May 2020.

An 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.

Beyond that, Kraninger also states the bureau is “considering” adding a new parameter to the QM rule that would add a “seasoning” component to the lending rules.

“This approach would create an alternative pathway to QM safe-harbor status for certain mortgages when the borrower has consistently made timely payments for a period.”

It should be noted that none of these rule changes are actually proposed yet, and it is, therefore, possible that some of them may not come to pass. But Kraninger’s wording on the DTI threshold indicates that factor will be much less important going forward.

Kraninger closes her letter by suggesting that legislation could “better accomplish” clarifying the rules on QM loans, although efforts to do so have stalled out in Congress so far.

“While the Bureau is moving forward expeditiously to address the upcoming expiration of the GSE Patch, we recognize that legislation could better accomplish important policy objectives, such as providing clarity on what qualifies as a QM loan, leveling the playing field among lenders, and ensuring consumers continue to have access to credit,” Kraninger wrote.

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