The Consumer Financial Protection Bureau’s proposed changes to the Qualified Mortgage rule are earning high praise from a top industry association.
In June, the CFPB issued a proposed rulemaking that would eliminate the 43% debt-to-income ratio requirement for qualified mortgages in favor of a “price-based” approach and allow the so-called GSE Patch, which allows Fannie Mae and Freddie Mac to avoid that DTI requirement, to expire.
In a letter to the CFPB, the Housing Policy Council (HPC) commended the proposal, saying it would “create clear, objective standards that insure QMs are based on a consumer’s ability to repay and that creditworthy borrowers are not denied access to affordable housing.”
“We are thrilled,” HPC Executive Vice President Meg Burns told MPA. “We proposed a framework that was very consistent with this proposed rule when they issued their advance notice of proposed rulemaking and solicited public input.”
Burns said that the proposal is really making QM what it was intended to be in the Dodd-Frank Act.
“What they’ve done is embraced the original statutory framework. They’ve gone back to what the original Dodd-Frank law said. [The CFPB] added onto some of the core obligations set forth in the statute.”
Those additions included the 43% DTI requirement, Burns said.
“When they recognized that the 43 DTI could be fairly constraining, they added the GSE Patch to the regulation,” she said.
In streamlining the regulation, Burns said, the CFPB is merely stripping away the excess from the QM rule.
“They determined that the features of the regulation that were the most problematic were the add-ons,” she said. “We really feel strongly that they’ve moved this in the right direction.”
The problem with the current QM rule, Burns said, is that it needlessly duplicates requirements that are already in Dodd-Frank’s Ability-to-Repay (ATR) rule, which already apply to all mortgages.
“The core of that law is all about requiring creditors to ensure – for all mortgages – that the borrower has the ability to repay,” Burns said. “There are a couple of exceptions in the law, but at its core, the point of the law was to make sure that every mortgage in America was underwritten with a certain set of criteria.”
Those criteria, she said, included confirmed income and debt, as well as debt-to-income ratio.
“On top of that, the law said that some subset of mortgages would be provided with the QM designation,” Burns said. “The QM designation doesn’t take the place of ATR requirements. It just means that qualified mortgages, as a subset, are considered to be the safest – the kind of mortgage they wanted to encourage. … The QM designation doesn’t need to have redundant standards to ATR, which is one of the reasons that removing the DTI really makes sense.”
The current QM requirements, Burns said, have made it difficult for many creditworthy borrowers to find financing.
“A number of loans that would otherwise have been made, if they couldn’t be done under the GSE Patch, often weren’t done at all,” she said. “Because Fannie Mae and Freddie Mac are subject to loan limits, sometimes loans above those limits – even when the credit files were otherwise very good – weren’t done at all. Customers who had particular types of income and employment that couldn’t be documented under Appendix Q were much more challenging to serve.”
And because the GSE Patch allowed Fannie and Freddie to ignore the 43% DTI rule, “a huge segment of loans that shouldn’t have been delivered to the GSEs were, and the GSE share expanded as a result of the effects of that patch,” Burns said. “The patch was never intended to be anything more than temporary. They feel comfortable that it’s time to expire – and with the expiration of the patch, these other changes are critical. It’s the expiration of the patch that goes hand-in-hand with the overhaul we see in this proposal.”