CFPB Plans to Let QM Patch Expire


The Consumer Financial Protection Bureau (CFPB) is planning to allow the controversial QM patch rule expire in January 2021, however, it may impose a brief extension to facilitate a smooth transition.

The QM patch allows government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to sidestep a key provision of the Ability to Repay/Qualified Mortgage (ATR/QM) rule that requires certain loans to meet a 43% debt-to-income ratio. Under the patch, the GSEs can allow certain loans to exceed the 43% DTI requirement.

In a notice of proposed rule making the bureau explains that the patch has significantly increased the GSEs’ share of the mortgage market and has raised concerns that the rule gives lenders who work with the GSEs an unfair advantage over those that do not.

The CFPB is soliciting comments on possible amendments to the ATR/QM Rule, including whether to revise Regulation Z’s definition of a qualified mortgage in light of the GSE patch’s scheduled expiration.

Specifically, the bureau seeks comment on whether the definition of qualified mortgage should retain a direct measure of a consumer’s personal finances (for example, debt-to-income ratio), and whether the definition should include an alternative method for assessing financial capacity.

“Loans backed by Fannie Mae and Freddie Mac make up a large portion of the U.S. mortgage market,” says Kathleen L. Kraninger, director of the CFPB, in a statement. “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.

“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,” Kraninger says. “The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE patch.”

A recent study found that some lenders are offering QM patch loans when they are not necessary, the CFPB says.

“Earlier this year, the bureau released an assessment of its [ATR/QM rule] and found that GSE QM loans represent a large and persistent share of originations in the conforming mortgage market and that creditors generally offered a temporary GSE QM loan even when a general QM loan could be originated,” the bureau says in its notice.

Some industry groups have expressed concern that doing away with the QM patch could negatively impact the mortgage and housing markets, as it enables thousands of borrowers – mostly minority and low-income borrowers – to obtain a mortgage when they otherwise might not be able to do so.

The QM patch accounted for 16% of all mortgage originations in 2018, according to a recent analysis by Pete Carroll, executive, public policy and industry relations with CoreLogic.

Organizations including the Mortgage Bankers Association have lobbied for changes to the ATR/QM rule before the patch expires.

“We all know the current system is flawed,” Robert Broeksmit, CMB, president and CEO of the Mortgage Bankers Association, said during the MBA’s recent National Secondary Market Conference in New York. “While necessary at the time, the continued reliance on the patch directs too much of the market to government-backed channels. It helps explain why we haven’t seen the return of a truly private [mortgage-backed securities] market at the level we would have hoped.”

The MBA supports a rule that fixes two issues: permitting lenders to move away from the static requirements of Appendix Q and instead allow them to document borrower income through methodologies already in place in the GSE guides or the FHA, VA and USDA handbooks; and establishing a cut-off of 43% as a maximum allowable debt-to-income ratio.

“Unless these problems are fixed, we fear that many loans that qualify as QMs today will either move to FHA or not get made at all,” Broeksmit said. “At the very least, if the patch is to be extended temporarily, it should also be expanded to provide safe-harbor status to more private loans – including jumbo loans. Qualified consumers deserve more options and better prices on their mortgages.”

Mark Calabria, director of the Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, says allowing the patch to expire will “level the playing field, foster competition in our nation’s housing finance market, and bring us one step closer to comprehensive housing finance reform.”

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