5 changes lenders want from CFPB’s rewrite of QM rule

CFPB Director Kathy Kraninger has said the CFPB intends to shift away from the patch or consider only a short extension to “facilitate a smooth and orderly transition” for mortgages backed by the government-sponsored enterprises.

Commenters urged her agency to pursue the latter. They noted the regulatory and possible housing market impact of a slice of Fannie Mae and Freddie Mac loans no longer having QM status. The patch is now set to end in January 2021.

“Considering the numerous steps that need to occur, and the challenges across many industries — notably including the homebuilding industry and the secondary market — while the expiration date for the patch looms, we urge that a sufficient extension of the patch be announced along with the plan,” wrote Kenneth Gear, the CEO of the Leading Builders of America, in a comment letter.

The amount of time the market needs to prepare for that sunset will be determined by the complexity of the CFPB’s final rule on QM change, said Michael DeVito, executive vice president and head of home lending at Wells Fargo.

“Eliminating DTI and Appendix Q would require the least amount of time (with the caveat that timing may increase if additional factors are introduced),” he said in the bank’s comment letter. “Eliminating the Patch and retaining the DTI cap and Appendix Q in one form or another — which we believe would be detrimental to the market — would require more time.”

The January 2021 expiration of the patch will also be complicated by the transition to a new interest rate benchmark the same year, DeVito added, and banks might need more time to prepare.

“In addition to the GSE Patch, LIBOR also sunsets in 2021 and will require significant technology resources through that date,” said DeVito. “Additionally, the timing of possible changes to the Home Mortgage Disclosure Act and Uniform Residential Loan Application remain uncertain and could overlap.”

A short-term extension would also give the CFPB more time to research alternative ways to measure a borrower’s ability-to-repay, according to a comment letter filed jointly by a number of consumer protection organizations, including the National Consumer Law Center and the National Association of Consumer Advocates.

“The Bureau could leverage [the Federal Housing Finance Agency’s] expertise and effort in adjustments to the patch while the Bureau develops a stable, long-term solution and a transition plan,” those commenters suggested.

If the CFPB were to end the QM patch without some kind of replacement, it would be detrimental to lower-income and minority borrowers, several commenters warned.

“If lenders remain unwilling to originate loans for average families without full liability protection, this could further restrict access to credit for borrowers of color, who represent a disproportionate share of QM patch loans and remain underserved by conventional mortgage credit,” wrote a group of nine Democrats on the Senate Banking Committee, including ranking member Sherrod Brown, D-Ohio, and Sen. Elizabeth Warren, D-Mass.

The consortium of consumer advocacy groups also recommended that the CFPB conduct thorough analysis of how any changes might impact minorities.

“There is a real risk that hasty or ill-considered action by the Bureau in adjusting the Qualified Mortgage definition could make access to credit worse for communities of color and low-income communities, either immediately with a market shock that severely restricts access to these traditionally underserved communities or over a longer term by blessing predatory practices that further strip wealth from these communities,” the groups said.

While the CFPB’s advance notice of proposed rulemaking suggested that borrowers with a DTI of above 43% might obtain a non-QM loan, the Mortgage Bankers Association cautioned that that wouldn’t be a realistic option for many lower-income borrowers.

The organization cited the CFPB’s own finding that non-QM loans are priced about 119 basis points higher than similar QM loans.

“Should the expiration of the GSE Patch prompt growth in the non-QM market, it would likely do so at the expense of borrower affordability,” wrote Robert Broeksmit, MBA president and CEO. “Such a result would be inconsistent with the Rule’s underlying statutory purpose to ensure consumer access to affordable mortgage credit.”

And if lenders are unwilling to originate or purchase non-QM loans, a large swath of borrowers would be completely cut out of the mortgage market, Broeksmit added.

“At roughly one-sixth of the overall mortgage market, eliminating even a portion of this segment would have harmful effects on access to credit generally and significant economic implications, extending well beyond the housing market,” he said.

The CFPB absolutely must address where those loans that exceed the DTI limit “would go, if they would be made at all, and on what terms, before the expiration of the patch,” the NCLC and NACA, along with other organizations, wrote in their comment letter.

“Abandoning the patch, as the Bureau has said it intends to do, while leaving in place a hard DTI cut off would be a serious blow to both congressional intent and to practical access to home finance for millions of qualified borrowers, especially borrowers of color,” the groups said.

Most commenters to the CFPB agreed that the 43% DTI limit should be eliminated entirely and replaced by either compensating factors to assess a borrower’s ability to repay or a higher threshold.

“The simplest reform that the Bureau could undertake would be to remove the DTI ratio threshold,” wrote Broeksmit in MBA’s comment letter. “This approach would effectively set the parameters of the QM general definition as the various product feature requirements currently in place.”

This would ensure that all borrowers would be able to maintain access to credit, agreed the Credit Union National Association in its comment letter.

“CUNA firmly believes that eliminating rigid adherence to the 43% debt-to-income ratio and Appendix Q verification requirements in the underlying qualified mortgage definition would enable credit unions to continue providing access to responsible mortgage credit without introducing additional credit risk into the marketplace,” wrote Mitria Wilson, the group’s senior director of advocacy and counsel.

When the CFPB announced the ANPR, Kraninger suggested changes to the DTI level are on the table.

"We’re taking comment on a few things, first and foremost what that definition of a qualified mortgage would be after the patch is gone, including what debt-to-income ratio looks like, what the ratio should be ... in terms of that QM definition, whether 43% DTI is something that makes sense to continue," she said.

The National Association of Realtors suggested using both DTI and residual income to assess a borrower’s ability to repay.

“NAR supports a QM standard that incorporates a reasonable DTI ratio in conjunction with other factors,” wrote NAR President John Smaby. “Borrowers should have enough residual income after making their monthly mortgage payment, including taxes and insurance, to meet their needs for food, utilities, clothing, transportation, work-related expenses and other essentials.”

Other organizations also appeared to approve of the idea of using compensating factors either instead of or in tandem with a borrower’s DTI ratio.

“While there are many variants of compensating factors, the basic premise is that QM status would be determined through a more holistic view of the consumer’s personal finances and the features of the loan,” said Broeksmit. “This approach ensures that a DTI ratio is not the sole reason that a loan fails to achieve QM status.”

The Leading Builders of America also proposed analyzing factors such as “cash reserves, equity in the property, credit as well as reserves, debt and income.”

“Using these and other factors would clearly allow a more holistic view of the consumer’s ability to repay,” said Gear.

However, Gear advised against using credit scores and loan-to-value ratios, arguing that they could have “unintended consequences.”

“We believe employing an LTV alone as a substitute for DTI would severely disadvantage consumers in many areas where housing prices are low,” he said. “Beyond that, considering the profound differences in wealth across protected classes, we believe the use of LTV alone is likely to present significant Fair Housing Act concerns.”

Using credit scores could also “raise fair lending concerns,” he said.