(September 2019) This summer, the Consumer Financial Protection Bureau (CFPB) issued an Advance Notice of Proposed Rulemaking (ANPRM) announcing that it plans to let the temporary Qualified Mortgage provision for loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac – otherwise known as the GSE patch – expire in January 2021 even if the GSEs are still in conservatorship.
The expiration of the GSE Patch is of critical importance to anyone working on homeownership for underserved individuals or communities. Below is information about Qualified Mortgages, the GSE Patch, how the use of the Patch has supported homeownership, what the CFPB is planning to do next, and how you can weigh in on that decision.
What is a Qualified Mortgage?
The Dodd-Frank Act prohibits a lender from making a residential mortgage loan unless the lender makes a “reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan.” To do so, the creditor must consider the consumer’s credit history, current and expected income, current obligations, debt-to-income ratio or residual income after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than equity in the dwelling or real property that secures repayment of the loan.
However, because this Ability to Repay standard references what are essentially a lender’s subjective judgments, lenders fear finding themselves in a legal or regulatory dispute over whether they met the standard. To give lenders more certainty, Dodd-Frank also included a special category of loans called Qualified Mortgages (QMs) that protect the lender from liability. The statute defined qualified mortgage to mean any residential mortgage loan for which:
- There is no negative amortization and there are no interest-only or balloon payments;
- The loan term does not exceed 30 years;
- The total points and fees do not exceed 3 percent of the loan amount;
- The income and assets relied upon for repayment are verified and documented;
- The underwriting uses a monthly payment based on the maximum rate during the first five years, uses a payment schedule that fully amortizes the loan over the loan term, and considers all mortgage-related obligations;
- The loan complies with any guidelines or regulations established by the Bureau relating to the ratio of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt.
When the CFPB issued regulations to implement Dodd-Frank provisions, it used its authority under that last bullet to set a specific debt-to-income ratio of 43 percent for QMs. They also released Appendix Q, which contains guidance to lenders for how to calculate and verify debt and income for the purpose of complying with the 43 percent limit.
What is the GSE Patch?
When it issued the QM rules described above, the CFPB market also established a second, temporary category of QMs. This category did not have to abide by the 43 percent DTI limit or Appendix Q, but instead had to be eligible to be purchased or guaranteed by either Fannie Mae or Freddie Mac while under the conservatorship of the Federal Housing Finance Agency – which is why it is known colloquially as the GSE Patch.
Using the Patch, the GSEs have been able to buy and guarantee loans with DTIs above 43 percent and without requiring lenders to comply with Appendix Q. According to the Urban Institute, the GSE Patch has facilitated access to homeownership for approximately 3.3 million borrowers whose DTIs were over 43 but were otherwise creditworthy, which represents nearly 20 percent of the loans guaranteed by the GSEs over the last five years. Outside of the GSE and FHA channels, QM lending has been constrained by the perceived difficulty of complying with the hard DTI cap and Appendix Q, and non-QM lending is constrained by lenders wishing to avoid the risk of liability.
What is the CFPB Doing and How Can I Provide Input?
In its ANPRM, the CFPB announced that it plans to allow the GSE Patch to expire in January. It is now seeking input on whether the Qualified Mortgage definition should still include a DTI ratio or any alternative method for assessing financial capacity, or whether it should be limited to the statutory criteria alone. Responses to the ANPRM are due this coming Monday, September 16, 2019.
While we realize it is unlikely that anyone encountering this issue for the first time will be able to prepare a comprehensive response to the ANPRM, NCST has joined a number of other housing and consumer organizations on a coalition letter, which you might want to adapt for your own use.
The letter focuses on the harm that a hard 43 percent DTI would cause to potential borrowers, especially LMI borrowers and borrowers of color, who tend to have higher DTIs than the population as a whole. Specifically, we recommend that the CFPB remove the hard DTI cap from the Qualified Mortgage definition. We also recommend the CFPB reinforce that all loans – whether they are QM or non-QM – have to abide by the Dodd-Frank statutory requirement that lenders must assess a borrower’s ability to repay the loan. You can see the letter here.
As always, please let the NCST policy team know if you have any questions about the topic of this column.
Julia Gordon is the President of NCST.