The Consumer Financial Protection Bureau (CFPB) plans to replace the debt-to-income (DTI) ratio in its Qualified Mortgage (QM) definition with an alternative measure of credit risk.
As the Bureau prepares a proposed Ability-to-Repay regulation in anticipation of the end of the “GSE Patch” in 2021, it also considers replacing the DTI requirement.
The 2014 Ability-to-Repay Rule requires lenders to make a reasonable and good faith determination before closing a closed-end residential mortgage loan that the consumer will have a reasonable ability to repay the loan. If a loan qualifies as a QM, it will fall within a safe harbor under the ability-to-repay standards if the annual percentage rate is within 1.5% of the average prime offer rate. To qualify as a General QM (the broadest category), the borrower’s DTI ratio cannot exceed 43%.
The Rule allowed loans purchased or guaranteed by Fannie Mae and Freddie Mac (the GSEs) to exceed the 43% ratio—a condition known as the GSE Patch. A 2019 CoreLogic analysis stated that the GSE Patch accounted for 16% of all mortgage originations in 2018 and that its removal without further changes to the Rule would be more pronounced for low-income borrowers, minorities, millennials, retirees, and non-W-2 wage earners.
The Patch is set to expire on January 10, 2021. The CFPB announced in July 2019 that it plans to terminate the Patch on its scheduled expiration date (or possibly after a short extension), and launched a rulemaking that many industry observers expected to redefine the criteria for QMs.
The CFPB’s Current Plans
Kraninger noted in her letter to Congress that the CFPB plans to recommend in its proposed Rule that DTI ratios be replaced as a factor in mortgage underwriting. One alternative, she said, would be a pricing threshold based on the difference between the loan’s annual percentage rate and the average prime offer rate for a similar loan. The CFPB currently offers a rebuttable presumption of compliance instead of a safe harbor for QMs with an annual percentage rate that exceeds the average prime offer rate by over 1.5%.
Kraninger also said that the Bureau is considering an alternative means of acquiring QM safe-harbor status for certain loans when the borrower has consistently made timely payments for some time.
She announced that the CFPB might extend the GSE patch for a short period after its January 2021 scheduled termination date, “until the effective date of the proposed alternative or until one or more of the GSEs exit conservatorship, whichever comes first.
Kraninger concluded her letter by stating her preference that Congress clarify the QM rules through legislation. “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,” she said.
According to Kraninger’s letter, the CFPB expects to publish a proposed Ability-to-Repay rule “no later than” May 2020.
The CFPB’s specific plans for dealing with the expiration of the GSE Patch will not be known until it publishes its proposed Rule. It’s also uncertain whether it intends to modify QM standards other than the DTI ratio. But, it has made clear in recent announcements that this issue is one of its top priorities for 2020, so the industry can expect to see proposals soon that could significantly change the QM market.
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.