the Consumer Financial Protection Office It announced two notices of a proposed regulation on Monday around what is commonly known as the QM Patch. One such rule would eliminate the debt-to-income requirement on qualified mortgages.
In January CFPB Director Kathy Kraninger sent a letter to several prominent members of Congress, saying the office had decided to propose an amendment to the QM Rule that would “stray” from DTI as a factor in mortgage underwriting. .
Specifically, Kraninger said at the time that the CFPB decided to change from the DTI standard and move to an “alternative, such as a price threshold (ie, the difference between the annual percentage rate of the loan and the average preferential offer rate for a comparable transaction fee.) “
Now Kraninger is following that plan.
In the first notice of the proposed regulation, the office wants to amend the definition of a qualified mortgage in Regulation Z to replace the DTI limit with a price-based approach, saying it preliminarily concludes that the price of a loan, measured by comparing the Annual Percentage Rate on a Loan The average prime offer rate for a comparable transaction is a more holistic and flexible measure of a consumer’s ability to pay than DTI alone.
For QM status eligibility under QM’s general definition, the office proposes a price threshold for most loans, as well as higher price thresholds for smaller loans, which is particularly important for manufactured homes and for minority consumers. The NPRM also proposes that lenders take consumer income, debt, and the DTI or residual income ratio into account and verify the consumer’s income and debts.
The CFPB enacted the Ability to Pay / Qualified Mortgage rule after the financial crisis and requires lenders to verify the borrower’s ability to pay the mortgage before lending money. This includes a review of the borrower’s debts and assets to ensure they have the ability to repay the loan, on the condition that their DTI ratio does not exceed 43%.
But Fannie mae and Freddie mac they are not subject to this requirement, a condition known as QM Patch. According to the QM patch, loans sold to Fannie Mae or Freddie Mac may exceed the DTI ratio of 43%.
“The expiration of the GSE patch will facilitate a more transparent and level playing field that ultimately benefits consumers by promoting more vigorous competition in the mortgage markets,” said Kraninger. “The office proposes to replace the patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while ensuring that consumers are able to repay them. The office is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transitions outside of the GSE patch. “
The QM patch will expire in January 2021, and last year the CFPB moved to officially remove the QM patch on its set expiration date, however, the second notice of Monday’s proposed CFPB regulation would move that date to ensure good transition management.
The office proposed to amend Regulation Z to extend the QM Patch to expire on the effective date of a final rule regarding the proposed amendments to the first notice to the general definition of QM loan in Regulation Z.
“The office proposes to take this step to ensure that responsible and affordable credit remains available to consumers who may be affected if the GSE patch expires before the amendments take effect as defined in the first NPRM,” stated the CFPB.
This could be good news for the housing industry, which has long been calling for the end of the QM patch.
“United States Real Estate Agents applaud 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 one point in time. that market stability is so critical. ” National Association of Real Estate Agents President Vince Malta said. “Perhaps most importantly, we appreciate the Office’s decision to remove a tough DTI standard, and we look forward to taking a closer look at the proposed replacements and their impact on home buyers in the coming months.”