Allowing the patch to expire could have negative consequences for low-income and minority borrowers. Will the CFPB's proposed rule changes help?
On Monday, the Consumer Financial Protection Bureau announced two proposed rules regarding the so-called GSE Patch, also known as the QM patch. One of the proposals would remove the current debt-to-income (DTI) requirements for qualified mortgages, while the other would extend the patch – originally set to expire in January 2021 – until a final rule on the DTI requirement was issued.
The GSE Patch allows Fannie Mae and Freddie Mac to avoid some of the stricter requirements of Dodd-Frank’s Ability to Repay/Qualified Mortgage (ATR/QM) Rule. But what do the proposed changes mean for mortgage originators and borrowers?
“In terms of what (the GSE Patch) means, the biggest thing is that loans eligible for purchase by the GSEs get QM eligibility,” Pete Carroll, executive for public policy and industry relations, told MPA. “In the absence of the GSE patch, the pathways to QM eligibility narrow. QM eligibility tends to be the deeper, more liquid mortgage market. Non-qualified lending has been a bit sparse. It picked up a bit in 2018 and 2019, but it’s still nowhere near the scale of the QM market. If the GSE Patch goes away, there are product features required by Dodd-Frank for a loan to be a qualified mortgage. Importantly, they have to have fully documented income, assets and debts.”
They also have to have a DTI ratio of 43% – a requirement the patch has allowed Fannie and Freddie to avoid. If the patch expires without the CFPB’s proposed rules going into effect, Carroll said, it could have a significant impact on many borrowers – especially minority borrowers.
“There are a lot of loans above the 43% ratio that were originated under that GSE patch – by our calculations, roughly 16% of originations, or about $260 billion in volume annually,” Carroll said. “The profiles of those borrowers tend to be moderate- to low-income African Americans or Latinx borrowers. So there’s a lot at stake when it comes to affordable housing. We’re talking about a significant number of loans that would have to be made under the FHA program, as non-qualified mortgages – or not at all.
“If the patch were to expire without this new proposal, it would have disproportionately affected minority borrowers,” Carroll said. “The question is with the new rule, will that be the case?”
The proposed rule to eliminate the DTI requirement and replace it with a “price-based” approach could help, Carroll said. 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” approach.
“There were express requirements for how lenders had to go about documenting income, assets and debts,” Carroll said. “Under this proposal, all of that prescriptive rulemaking has been eliminated. The hope is that will address any impact on low- and moderate-income African American or Latinx borrowers.”
Carroll said the proposal to eliminate the DTI rule seemed to be a good middle ground between over-prescriptiveness and laxness.
“What our research demonstrates is that price reflects underwriting. What we’ve observed over the last six years is that underwriting criteria have been strong,” he said. “The GSEs have driven a lot of that. Price reflects the underwriting quality, because price reflects risk. Assuming that underwriting maintains the same level of quality, that should hopefully strike a balance between access to credit and assuring the borrower’s ability to repay.”