CFPB Proposed Rulemaking Would End Qualified Mortgage ‘Patch'

Mike Sorohan msorohan@mba.org

July 26, 2019


The Consumer Financial Protection Bureau yesterday issued an Advance Notice of Proposed Rulemaking that would end the temporary Qualified Mortgage "Patch" applicable to certain mortgage loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac.

The ANPR refers to the Bureau's Ability to Repay/Qualified Mortgage rule, also known as the QM "Patch," which is slated to expire no later than Jan. 10, 2021. The ANPR states that the Bureau currently plans to allow the QM Patch to expire in January 2021 or after a short extension, if necessary, to facilitate a smooth and orderly transition.

The ANPR solicits comments on possible amendments to the ATR/QM Rule, including whether to revise Regulation Z's definition of a qualified mortgage in light of the QM Patch's scheduled expiration. The ANPR seeks information and comment on whether the definition of qualified mortgage should retain a direct measure of a consumer's personal finances (for example, debt-to-income ratio), and whether the definition should include an alternative method for assessing financial capacity.

The Dodd-Frank Act amended the Truth in Lending Act to establish ability-to-repay requirements for most residential mortgage loans. TILA identifies factors a creditor must consider in making a reasonable and good faith assessment of a consumer's ATR. TILA also defines a category of loans called qualified mortgages for which creditors may presume compliance with the ATR requirements.

The QM Patch, adopted in the Ability to Repay/Qualified Mortgage Rule, expanded the definition of qualified mortgage to include certain mortgage loans eligible for purchase or guarantee by the GSEs, and in most cases these loans are granted a safe harbor from legal liability in connection with the ATR requirements. These temporary GSE QM loans generally qualify for that safe harbor from legal liability even if their debt-to-income ratio exceeds the 43 percent threshold otherwise generally required for loans to obtain qualified mortgage status.

"Loans backed by Fannie Mae and Freddie Mac make up a large portion of the U.S. mortgage market," said CFPB Director Kathleen Kraninger. "The national mortgage market readjusting away from the Patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection. We want to hear all perspectives on how to move beyond the GSE Patch, the impact on credit, the role of the private mortgage market, and possible modifications to the definition of qualified mortgages and the rules governing the documentation of debt and income. 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 Mortgage Bankers Association has long-advocated for improvements to the QM Patch. At the MBA National Secondary Market Conference in New York this past May, MBA President and CEO Robert Broeksmit, CMB, said such improvements would put private capital on a more level playing field with Fannie Mae and Freddie Mac.

"We all know the current system is flawed," Broeksmit said. "While necessary at the time, the continued reliance on the Patch directs too much of the market to government-backed channels. It helps explain why we haven't seen the return of a truly private [mortgage-backed securities] market at the level we would have hoped."

MBA supports a rule that fixes two issues: permitting lenders to move away from the static requirements of Appendix Q and instead allow them to document borrower income through methodologies already in place in the GSE guides or the FHA, VA and USDA handbooks; and find an alternative to the 43% DTI that allows creditworthy high DTI borrowers to qualify for QMs.

"Unless these problems are fixed, we fear that many loans that qualify as QMs today will either move to FHA or not get made at all," Broeksmit said. "At the very least, if the Patch is to be extended temporarily, it should also be expanded to provide safe-harbor status to more private loans--including jumbo loans. Qualified consumers deserve more options and better prices on their mortgages."

Earlier this year, the Bureau released an assessment of its Ability to Repay/Qualified Mortgage Rule and found that GSE QM loans represent a "large and persistent" share of originations in the conforming mortgage market and that creditors generally offered a Temporary GSE QM loan even when a General QM loan could be originated.

The ANPR can be accessed at https://files.consumerfinance.gov/f/documents/cfpb_anpr_qualified-mortgage-definition-truth-in-lending-act-reg-z.pdf.

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