CFPB proposes extending GSE Patch, nixing DTI requirements

by Ryan Smith23 Jun 2020

The Consumer Financial Protection Bureau on Monday issued two proposed rules to address the impending expiration of the so-called GSE Patch (also known as the QM patch), a rule that allows Fannie Mae and Freddie Mac to avoid some of the stricter underwriting requirements of the Ability to Repay/Qualified Mortgage (ATR/QM) rule. One of the CFPB’s Notices of Proposed Rulemaking (NPRM) proposes extending the GSE Patch, which is currently set to expire in January 2021 or when Fannie and Freddie exist conservatorship, whichever comes first. The other would remove the debt-to-income (DTI) requirement from qualified mortgages.

“The CFPB’s ATR/QM proposed rulemaking has significant bearing on the balance between homeowner ability to sustain their mortgage payments and broad access to affordable mortgage credit,” Pete Carroll, executive for public policy and industry relations for CoreLogic, said in an email to MPA.

The CFPB had stated before that it planned to allow the GSE Patch to expire, saying the elimination of the rule would result in a “level playing field” for the mortgage market. Some industry groups, including the National Association of Realtors, argued that eliminating the patch could result in higher costs or reduced access to mortgages for home buyers.

Some non-QM lenders, however, argued that the patch was just a way to turn non-QM loans into qualified mortgages, and wasn’t really necessary anymore.

“At the time of the QM designation, there was really no private capital in the non-QM space,” Tom Hutchens, executive vice president of production for Angel Oak Mortgage Solutions, told MPA in an earlier report on the GSE Patch. “But fast-forward five years, and Angel Oak and others have worked hard to bring private capital into this space. These borrowers can still get loans through that private capital. That just wasn’t the case in 2014.”

However, one of the main facets of the GSE Patch was allowing an exception for Fannie and Freddie to the broader 43% DTI requirement for qualified mortgages – and one of the bureau’s NPRMs proposes eliminating the DTI requirement in favor of a “price-based” approach.

The CFPB said that considering a loan’s price – as measured by comparing its annual percentage rate to the average prime rate offer for a comparable transaction – was “a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.

Under the other NPRM, the CFPB would extend the GSE Patch until the effective date of a final rule on moving away from DTI to a price-based system.

“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,” said 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. 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.”

The NAR voiced immediate support for the proposed rules.

“America’s realtors applaud the CFPB’s action to provide a temporary QM patch extension, and commend the bureau and Director Kraninger for acting on behalf of our nation’s consumers and home buyers at a time when market stability is so critical,” said Vince Malta, NAR president. “Perhaps most importantly, we appreciate the bureau’s decision to eliminate a hard DTI standard, and we look forward to more closely examining the proposed replacements and their impact on home buyers over the coming months.”

Mortgage Bankers Association President and CEO Bob Broeksmit also voiced support.

“As proposed, the regulatory changes would seek to ensure creditworthy borrowers have access to sustainable mortgage credit without disruption to the overall mortgage market,” Broeksmit said.