Written By: Joel Palmer, Op-Ed Writer
The Consumer Financial Protection Bureau (CFPB) is seeking input related to the expiration of the bureau’s Ability to Repay/Qualified Mortgage (ATR/QM) Rule.
This provision, also known as the GSE patch, is scheduled to expire January 10, 2021.
First implemented in 2014, the GSE patch is an exemption to the general qualified mortgage (QM) standard that requires a borrower to have a debt-to-income ratio of 43 percent or less. The exemption applies to mortgage loans backed by Fannie Mae and Freddie Mac.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Truth in Lending Act (TILA) to establish ability-to-repay requirements for most residential mortgage loans. TILA also defines a category of loans called qualified mortgages for which creditors may presume compliance with the ability-to-repay (ATR) requirements.
The GSE patch expanded the definition of qualified mortgage to include loans eligible for purchase or guarantee by the GSEs. In most cases these loans are granted a safe harbor from legal liability in connection with the ATR requirements.
Earlier this year, CFPB released an assessment of its Ability to Repay/Qualified Mortgage Rule and found that GSE QM loans represent a “large and persistent” share of originations in the conforming mortgage market. Furthermore, creditors generally offered a Temporary GSE QM loan even when a General QM loan could be originated.
In its Advance Notice of Proposed Rulemaking (ANPR), CFPB stated that it does not intend to make the GSE patch permanent.
“The national mortgage market readjusting away from the patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection,” said CFPB Director Kathleen L. Kraninger. “We want to hear all perspectives on how to move beyond the GSE patch, the impact on credit, the role of the private mortgage market, and possible modifications to the definition of qualified mortgages and the rules governing the documentation of debt and income.”
Data from the Urban Institute shows that purchase originations with DTI ratios over 43 percent have increased significantly since the GSE patch took effect:
•29 percent of Fannie Mae originations had DTI ratios above 43 percent in 2018, compared with 13.3 percent in 2013.
•Freddie Mac loans with DTIs over 43 percent increased from 14.1 percent in 2013 to 24.9 percent in 2018.
•For FHA loans, the increase was from 42.4 percent to 55.3 percent.
•In 2013, VA loans with higher DTI ratios accounted for 33 percent of volume, compared with 45.9 percent in 2018.
CoreLogic estimated that about 16 percent, or $260 billion, of 2018 mortgage loan origination volume was QM-eligible due to the GSE patch. In addition, African American and Hispanic or Latino borrowers accounted for the highest share of above 43 percent DTI loans in 2017.
“The GSE Patch has allowed Fannie Mae and Freddie Mac to back loans to many first-time home buyers, minority borrowers and rural families that simply would not have been able to buy a home otherwise,” said Jesse Van Tol, CEO of the National Community Reinvestment Coalition. “We are concerned that the CFPB is eliminating the only viable path to homeownership for many LMI borrowers that have had the toughest time accessing mortgage credit since the crisis. The CFPB must provide alternatives that ensure that the LMI borrowers benefiting from the GSE patch today continue to have viable paths to homeownership.”
The Urban Institute has proposed a rate-spread based approach to QMs. It recommends dropping the 43 percent DTI cap and the GSE patch from the QM rule, while maintaining restrictions on risky products, loan terms, and points and fees. It proposed a framework that would provide safe harbor status to first-lien mortgages as long as their annual percentage rate was no more than 150 basis points over the Average Prime Offer Rate (APOR). Loans priced under this threshold, the institute claims, are less risky.
“We believe replacing the current DTI-heavy framework with one that captures risk more holistically would more effectively expand access while mitigating credit risk,” it wrote in a recent report. “(It) would also create a more level playing field between the agency-backed and purely private capital–backed channels, potentially providing incentives for more private lending.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.