The Consumer Financial Protection Bureau (CFPB) has issued two Notices of Proposed Rulemaking (NPRMs) to address the impending expiration of the Government-Sponsored Enterprises Patch.
The patch – which is scheduled to expire in January 2021 or when Fannie Mae and Freddie Ma) exit conservatorship, whichever comes first – provides temporary qualified mortgage (QM) status to certain loans that are eligible for purchase or guarantee by either of the GSEs. These loans are eligible for QM status even if their debt-to-income (DTI) ratio exceeds the Truth in Lending Act’s 43% threshold.
The CFPB estimates that approximately 957,000 mortgages would be affected by the expiration of the patch, with many of these loans either not being made or being originated at a higher price.
“The GSE patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” says CFPB Director Kathleen L. Kraninger. “The bureau is proposing to replace the patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them.”
In the first NRPM, the CFPB proposes to amend the general QM definition in Regulation Z to replace the DTI limit with a price-based approach. The bureau is proposing a price-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.
For eligibility for QM status under the definition, the bureau is proposing a price threshold for most loans, as well as higher price thresholds for smaller loans, which is particularly important for manufactured housing and for minority consumers.
The NPRM also proposes that lenders take into account a consumer’s income, deb, and DTI ratio or residual income and verify the consumer’s income and debts.
In the second NPRM, the bureau proposes to amend Regulation Z to extend the GSE patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the general QM loan definition in Regulation Z.
The CFPB is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the patch expires before the amendments take effect as defined in the first NPRM.
“As proposed, the regulatory changes would seek to ensure creditworthy borrowers have access to sustainable mortgage credit without disruption to the overall mortgage market,” says Bob Broeksmit, president and CEO of the Mortgage Bankers Association, in a statement.
“MBA looks forward to reviewing and commenting on both rules, and we will continue to work with policymakers and all other stakeholders to ensure borrowers are both protected and have access to credit throughout the mortgage lending process.”
Photo: Kathleen L. Kraninger