The Consumer Financial Protection Bureau's (CFPB's) Ability-to-Repay (ATR) rule and its Qualified Mortgage (QM) standards must be improved to ensure more qualified borrowers can access safe and sustainable credit.
- The ATR rule requires lenders to determine that a borrower has a reasonable ability to repay a mortgage before the loan is consummated. The Dodd-Frank Act and this rule establish significant penalties and liability for failing to meet this requirement.
- The ATR rule provides a presumption of compliance for loans that are originated as QMs.
- In order for a mortgage loan to qualify as a QM, it may not contain certain "risky" features-such as interest only or negative amortization terms-and it must meet specified underwriting standards.
- These standards also include a debt-to-income (DTI) ratio cap of no more than 43 percent, or in the alternative, eligibility for Fannie Mae and Freddie Mac (the GSEs), the Federal Housing Administration (FHA), or other government programs (i.e., the so-called "QM patch").
- Borrowers also may not be charged points and fees that exceed three percent of the loan amount for loans greater than or equal to $102,894 (in 2017). Loans below that amount are permitted to have fees in excess of three percent, based on a sliding scale.
- The rule establishes a compliance safe harbor for QMs if the annual percentage rate (APR) of the loan does not exceed the average prime offer rate (APOR) for that mortgage by 150 bps or more. Loans to borrowers that exceed the APOR by more than 150 bps receive a rebuttable presumption of compliance if their loans otherwise qualify as QMs.
- Considering the significant potential liability and litigation expenses for an ATR violation, many lenders have limited themselves to making only QM safe harbor loans. Those few that do offer non-QM loans charge higher rates in order to offset potential legal and compliance risks, even if the underlying credit risk is relatively low. As a result, some categories of creditworthy borrowers that should qualify for a QM are have trouble gaining access to safe, sustainable and affordable mortgage credit.
MBA's Position / Next Steps:
- MBA is continuing to work with policymakers-including the CFPB-to improve the ATR rule in order to responsibly widen the credit box. MBA regards this area as a key priority for comment as the CFPB begins its Dodd-Frank Act-required "look back" at CFPB rules.
- Many recent efforts by the CFPB to adjust the rule, as well as several proposals in Congress, have focused on narrow QM fixes that work only for certain markets, charter types or business models (e.g., community banks, portfolio lenders and rural markets). Unfortunately, this addresses the needs for only a narrow segment of the borrowing public. While MBA appreciates these efforts to address flaws in the QM standard, MBA believes changes to the ATR rule should not be confined to particular types of institutions or business models. The QM definition should be fixed holistically, not revised in a piecemeal fashion with special exceptions for narrow categories of lenders.
- MBA has made a number of key recommendations for refining the QM definition:
- Expand the Safe Harbor: All loans satisfying QM requirements should be treated as safe harbor loans (e.g., the rebuttable presumption line at APOR + 150 bps should be eliminated). At minimum, the QM safe harbor threshold should be increased to 200 bps over APOR.
- Increase the Small Loan Definition: The current definition of a smaller loan under the ATR rule-where points and fees may exceed three percent and still qualify as a QM-is set at $102,894 for 2017. This metric is too low considering that the average loan size is approximately $260,000. As a consequence, too many smaller loans do not qualify as QMs. The loan size threshold for the three percent points and fees cap should be increased to $200,000, with a sliding scale that permits progressively higher points and fees caps for smaller loans. This change would increase QM lending to moderate-income borrowers who have smaller loan balances.
- Broaden Right to Cure for DTI and Other Technical Errors: MBA has led in advocating for an amendment that would permit the cure or correction of errors where the three percent points and fees limit is exceeded. To encourage lending to the full extent of the QM credit box, MBA also urges that the right to cure or correct errors be extended to DTI miscalculations and other technical errors.
- Revise the Points and Fees Definition: The QM points and fees calculation includes fees paid to lender-affiliated settlement service providers, but not to unaffiliated settlement service providers. MBA believes fees paid to affiliates should also be excluded from the points and fees calculation. This approach would result in greater competition between providers and benefit consumers. MBA supports legislative proposals that would exclude title insurance fees paid to lender-affiliated companies from the calculation of points and fees under QM.
- Fix "Appendix Q": The CFPB rule contains guidance in Appendix Q on how lenders are to document and verify income and assets, which has made it difficult for lenders to originate loans above a 43 percent DTI. Appendix Q is outdated and not as useful as alternative standards, such as the GSE, FHA and Department of Veterans Affairs (VA) underwriting standards for determining a consumer's DTI (including under the default QM). MBA urges the CFPB to explicitly permit alternative underwriting standards to be used by lenders instead of Appendix Q.
- Replace the QM Patch and the Default QM: While the QM patch is essential at this time, it expires the date the GSEs exit conservatorship-or January 10, 2021 (whichever is earlier). MBA urges the CFPB to begin work now to consider other transparent sets of criteria, including compensating factors, to define a QM-replacing both the QM patch and the 43 percent DTI standard. For example, residual income (similar to VA loans) could be considered as an alternative to DTI, or as a compensating factor for higher DTIs. Such a standard must provide workable, flexible underwriting standards that are consistent with the Dodd‐Frank Act without injecting undue complexity or uncertainty into the process of serving consumers' credit needs. Pending the development of a substitute or substitutes, the patch remains essential.
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