The Consumer Financial Protection Bureau (CFPB) announced two proposed rules on June 22 to address the Government-Sponsored Enterprises Patch (GSE Patch), which is scheduled to expire in January 2021.
Under the authority of the Dodd-Frank Act, the CFPB published a final rule in 2013 that identified factors a lender must consider when assessing the consumer’s ability to repay a mortgage loan. This Ability-to-Repay rule also defined a category of loans called Qualified Mortgages (QMs) that are presumed to comply with the requirements. One of the standards needed to achieve QM status is a debt-to-income (DTI) ratio of 43 percent or less.
The rule, however, allowed mortgage loans eligible for purchase by Fannie Mae or Freddie Mac (the GSEs) to be achieve QM status even if the DTI ratio exceeds 43 percent—a safe harbor that is commonly known as the “GSE Patch.” The GSE Patch is scheduled to expire on January 10, 2021. The CFPB announced in 2019 that it plans to terminate the GSE Patch on its scheduled expiration date, or possibly after a short extension.
The Potential Impact
According to the CFPB, almost one million mortgage loans could be affected by elimination of the GSE Patch. CoreLogic, a housing analytics firm, published in 2019 its own three-part analysis of how the expiration of the Patch can affect credit availability, based on data involving borrowers with DTIs of over 43%. It found that approximately 16% of total 2018 mortgage origination volume was QM-eligible solely because of the GSE Patch, and that removal of the Patch would be more pronounced for younger millennials, retirees, non-W-2 wage earners, Black or Hispanic borrowers, and low-income borrowers.
The Proposed Rules: A Price-Based Approach and GSE Patch Extension
The CFPB’s first proposed rule announces its intention to amend the QM definition in the Ability-to-Repay rule to replace the DTI threshold of 43% with a limit based on the loan’s pricing. Specifically, a first-lien residential mortgage loan could not be a QM if its annual percentage rate (APR) exceeds the average prime offer rate (APOR) by 2% or more.
The rule also proposes higher price thresholds for smaller loans, and a special APR calculation for adjustable-rate mortgages (ARMs). While a DTI limit would not be included as a QM factor, lenders still would be required to consider DTI or residual income and verify the consumer’s income and debts using “reasonably reliable” third-party records.
In a second proposed rule, the CFPB said that it intends to extend the GSE Patch until the effective date of its revisions to the QM loan definition rule. It says that it does not intend for this effective date to be prior to April 1, 2021, and therefore does not intend for the GSE Patch to expire prior to April 1, 2021.
The public has up to 60 days after Federal Register publication to comment on the proposed QM rule, and 30 days after publication to comment on the extension of the Patch.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.