On July 25th, the CFPB announced plans to allow the temporary Qualified Mortgage (QM) status given to loans eligible for purchase by Fannie Mae or Freddie Mac (the GSEs) to expire. However, the agency stated it could allow a short extension past the January 10, 2021 expiration date, and is in any case soliciting public comments on the general QM definition, including its income and debt documentation requirements.
When the CFPB issued its Ability-to-Repay/QM Rule in response to the Dodd-Frank Act, it sought to provide some bright-line tests for loans deemed generally safe for residential mortgage borrowers. The CFPB decided that a debt-to-income ratio (DTI) that does not exceed 43% was an appropriate proxy, along with several other factors. While the CFPB believed that many consumers can afford a DTI above 43%, those consumers should be served by the non-QM market, where lenders must individually evaluate the consumers’ compensating factors. However, the CFPB recognized that it may take some time, post-crisis, for a non-QM market to develop, even for credit-worthy borrowers. Accordingly, the CFPB created a category of loans that would temporarily enjoy QM status – loans that meet the GSEs’ underwriting criteria (plus a few other requirements). The CFPB set the expiration date for the temporary QM category at five years (unless the GSEs were to emerge from conservatorship prior to that).
Now, several years later, the CFPB has found that the temporary GSE QM “patch” represents a “large and persistent” share of originations, and likely was the reason the Rule did not result in decreased access to credit for those with DTIs over 43%. Accordingly, it is difficult to deny that the patch has played an important role in the housing finance markets. Without that patch going forward, the CFPB predicts that certain borrowers may turn to FHA, while other borrowers may try the private non-QM lending market, which the CFPB perceives to be gaining momentum. Other borrowers could try to lower their DTI by paying down debt and/or seeking a smaller loan. In the end, the CFPB predicts that some high-DTI borrowers simply may not be able to get a loan without the patch.
In any event, the CFPB indicates it has no plans to make the patch permanent, in part because it cannot presume that the GSEs’ guidelines will always produce loans that borrowers are reasonably able to repay. Additionally, the CFPB still hopes the private markets will step in to serve those borrowers.
Instead of extending the patch, the CFPB is requesting comments on possible revisions to the general QM definition, such as whether it should retain a DTI (or residual income) criterion at all, and if so at what level.
The CFPB also asks about the Rule’s Appendix Q, which contains the requirements for considering and documenting income and debt for general QM borrowers. Frustration with Appendix Q’s quirks may be one thing the public can agree on. Although Appendix Q was modeled after FHA guidelines, even FHA has revised its guidelines since the CFPB adopted them into Appendix Q. One frustration is that unlike other recognized sets of underwriting guidelines, Appendix Q does not address how a lender should underwrite a QM loan based on a consumer’s assets. Appendix Q also fails to address certain types of income, which means (based on language in the Rule’s commentary) that while a creditor may consider that income, the creditor is prohibited from including it in the DTI calculation. Appendix Q also can pose an undue obstacle for borrowers who are self-employed.
The CFPB asks whether it should retain Appendix Q, and if so, what changes the agency should make. Alternatively, the CFPB asks what other standard, if any, it should require or permit for the documentation of income and obligations.
Comments on the CFPB’s proposal for the patch, the general QM parameters, and Appendix Q are due September 16, 2019. After that, the CFPB will be somewhat pressed for time to complete this rulemaking, which will require another round of public comments, plus (one hopes) a reasonable period of time after the final rule is issued in advance of the deadline.