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 in excess of $101,953 (in 2015). 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. As a result, some categories of 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.
- An example of a recent improvement was the CFPB's adjustment of its mortgage rules to facilitate lending by small and rural lenders by expanding the number of small creditors who receive QM status for loans held in their own portfolios when a consumer's DTI ratio exceeds 43 percent. Moreover, under these new amendments an increased number of small creditors in rural or underserved areas are able to originate QMs with balloon payments, even though loans with balloon payments are generally not permitted to qualify as QM loans.
- While MBA appreciates these efforts to address flaws in the QM definition, 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.
- Specifically, 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. 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 $101,953 for 2015. 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 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.
- Replace the Patch and the Default QM: While the QM patch is essential at this time, it is only a temporary solution for loans with higher DTIs. MBA urges the CFPB to begin a process of working with stakeholders to develop a transparent set of criteria, including compensating factors, to define a QM-replacing both the QM patch and the 43 percent DTI standard. Such a standard must provide workable, flexible underwriting standards that are consistent with the Dodd-Frank Act but do not inject undue complexity or uncertainty into the process of serving consumers credit needs.
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