Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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The mortgage industry doesn’t want the DTI LLPA fee delayed. They want it killed

Ultimately, trade groups and lenders want an alternative that will eliminate the DTI-based LLPAs

The Federal Housing Finance Agency’s (FHFA’s) decision to delay implementing the controversial upfront fee on Fannie Mae and Freddie Mac borrowers with higher debt-to-income (DTI) ratios gave mortgage lenders a breather.

The agency postponed the implementation of the fee to August 1, and it also said lenders will not be subject to post-purchase price adjustments on any loans acquired Fannie Mae and Freddie Mac this year.

Though it’s undoubtedly a victory for the industry, it’s a partial one. Lenders and trade groups argue that the fee won’t be tenable when it does finally go into effect, whether that’s in May, August or in 2024.

The trade groups and lenders are lobbying for an alternative that will totally eliminate the DTI-based loan level pricing adjustments.

“While we appreciate the delay, we are disappointed that FHFA’s statement did not recognize the need to consider alternatives to using a debt-to-income pricing adjustment,” Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), said in a statement.

The Community Home Lenders Association (CHLA), which represents smaller lenders, also took a similar position — the FHFA should consider a full repeal of the DTI fee.

The DTI can fluctuate throughout the mortgage application and underwriting process and the FHFA’s new fees will inevitably lead to borrowers’ costs changing between application and closing, requiring multiple redisclosures that will increase compliance costs and confuse borrowers. 

“I’m happy with the delay but disappointed that it wasn’t replaced with an alternative,” Bill Lowman, vice chairman of American Pacific Mortgage said in an interview with HousingWire. “I think the industry supports eliminating the DTI-based LLPA,” he said.

As applicants – especially self-employed buyers – gather proof of income, the DTI ratio could change from the application to closing. If the lender has to go back to the borrower with a higher rate, it’s going to create trust issues with the consumer, Lowman explained.

It’s going to push more people into private financings, such as jumbo-type financing, even on conforming loan amounts, LOs against the DTI-based LLPAs, said Baret Kechian, a loan officer at loanDepot

“If they [FHFA] implement this, in the end, and they refuse to back down or modify it, I am going to leave the conventional loan and government business and go into hard money,” Elaine Roccio, a mortgage broker at PFI Financial, said in an interview. 

DTI pricing hits

Lenders will either need to disclose higher initial pricing to applicants who may ultimately not be subject to the LLPA or be prepared to, said Peter Idziak, senior associate of residential mortgage law firm Polunsky Beitel Green. In either scenario, costs to consumers will increase.

“From a compliance perspective, determining whether and when pricing changes based on a recalculated DTI constitute valid changed circumstances under TILA-RESPA Integrated Disclosure (TRID) rules is shaping up to be a bit of a nightmare within the industry,” Idziak said.

With profits already squeezed or in some cases non-existent and volume half of what it was a year ago, lenders can’t afford to take pricing hits because they are unable to fully pass on the LLPA to consumers due to fears of potential TRID violations, he explained. 

Pushing back the effective date of the DTI-based fee is to ensure all lenders have sufficient time to deploy the fee, the FHFA said Wednesday in explaining why it has postponed the DTI-based LLPA implementation.

The delay does give lenders more time to try and work through the operational and compliance challenges of implementing a DTI-based LLPA ad most importantly provides the industry more time to convince the FHFA to walk back this “misguided policy,” Idziak said.

“We will use the extra time offered by the change in the effective date to continue working with FHFA to explore alternatives that will not pose undue hardships on borrowers and lenders,” Broeksmit said.

The DTI ratio is not a strong indicator of a borrower’s ability to repay as noted by the revised definition of the general qualified mortgage, Brokesmit had said in a letter sent to FHFA director Sandra Thompson in February. 

The FHFA’s aim to increase access to credit and homeownership is a “laudable goal” but it’s important to first question whether it is appropriate to restrict credit access to one class of borrowers solely to improve access for others before suggesting alternative methods of achieving that goal,” Idziak said. 

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