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Mortgage industry provides commentary on CFPB’s proposed changes to QM loan definition

The two proposed rule amendments were met with a fair amount of support... and several revisions

Prior to the deadline for public commentary on Tuesday, housing industry trade groups, companies and organizations responded to the Consumer Financial Protection Bureau’s proposed rulemaking for the general qualified mortgage definition and the expiration of the QM patch in January 2021.

In June, the bureau released two proposals regarding the QM Patch, which allows loans sold to Fannie Mae or Freddie Mac to exceed the 43% debt-to-income ratio the Bureau had established in its Ability to Repay/Qualified Mortgage rule.

The first proposal was to amend the QM definition in Regulation Z to replace the DTI limit with a price-based approach – which the CFPB said was a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.

The second proposal was an amendment which would extend the QM Patch so that it would expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z.

“The Bureau’s objective with these proposals is to facilitate a smooth and orderly transition away from the Temporary GSE QM loan definition and to ensure access to responsible, affordable mortgage credit upon its expiration,” the Bureau said in a July release.

On July 9, the Bureau opened public commentary on the proposed rule up until Sept. 8 – resulting in several industry organizations voicing approval and suggestions for revisions.

Fannie Mae, whom the patch directly impacts, expressed support for the proposed definition but encouraged the Bureau to reconsider the specificity of the references to Fannie Mae’s Selling Guide as well as clarify its position on five-year ARMs.

“While the vast majority of Fannie Mae’s business falls within the proposed APR-APOR spread, Fannie Mae would support a higher cut-off for safe harbor and rebuttable presumption tiers and/or larger spread as mentioned in the Bureau’s proposal. Fannie Mae also requests that the Bureau provide immediate guidance on how the current APOR tables should be used for SOFR loans as they will start to be originated this fall,” Fannie Mae said.

Other commentary included that of the National Association of Realtors, which expressed appreciation for the CFPB’s clarification efforts but said it remains concerned that the proposed rule has not addressed several weaknesses that could result in higher and inconsistent costs for consumers, discrimination, and a weakening of safety and soundness.

In a 22-page letter addressed to the CFPB, the Mortgage Bankers Association expressed their support of the CFPB’s overall effort, but pointed out specific concerns, particularly the way the proposed changes affected the “bright line” for QM qualification.

The MBA cited the proposal’s added commentary here as problematic:

“Monthly debt-to-income ratio or monthly residual income. Under § 1026.43(c)(2)(vii), the creditor must consider the consumer’s monthly debt-to-income ratio, or the consumer’s monthly residual income, in accordance with the requirements in § 1026.43(c)(7). Section 1026.43(c) does not prescribe a specific monthly debt-to-income ratio with which creditors must comply. Instead, an appropriate threshold for a consumer’s monthly debt-to-income ratio or monthly residual income is for the creditor to determine in making a reasonable and good faith determination of a consumer’s ability to repay.” (Bolding added by MBA.)

The MBA commented: “Put simply, this Commentary provision might be read to state that any QM loan could be subject to an inquiry into or challenge based on the reasonableness or good faith of the creditor when determining the appropriate DTI ratio of a QM loan. This outcome would substantially impair the benefits of QM status to lenders and investors, introducing significant legal uncertainty into a regime meant to provide clear eligibility parameters. Such a provision in the General QM definition might result in credit-tightening overlays or higher pricing as lenders and investors attempt to quantify the risk.”

The MBA also urged the CFPB to adopt appropriate safe harbor boundaries, calling for the Bureau to “increase the safe harbor threshold for first-lien transactions in the General QM definition to a rate spread of 200 basis points. In doing so, the Bureau should eliminate the rebuttable presumption QM category for first-lien transactions altogether.”

The MBA also called for the Bureau to remove or amend the special rule for ARMs.

Other organizations that left public commentary include the U.S. Chamber of Commerce, National Consumer Law Center, National Fair Housing Alliance, Center for Responsible Lending, National Association of Home Builders, American Bankers Association, Urban Institute, National Association of Mortgage Brokers, National Association of Federal Credit Unions, Housing Policy Council, Quicken Loans, Credit Union National Association and the Manufactured Housing Institute.

In September 2019, several prominent members of the industry called for an elimination to the QM patch and reform for qualified mortgages. Following the end of the commentary for the proposed rulemaking, some organizations mentioned that while the latest revision is a step in the right direction it is not yet the concrete replacement needed for proper market stability.

According to a report from the Urban Institute, on a net basis, if the two proposed changes were in place in 2019, about 297,000 nonqualified loans would have been classified as qualified mortgages. The institute notes that “all of this gain in QM lending would come from the non-GSE conventional channel, partially offset by a relatively small number of GSE loans losing QM designation.”

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