CFPB Proposed Removing DTI from Qualified Mortgage Rule
Written By: Joel Palmer, Op-Ed Writer
Multiple reports last week indicated that the Consumer Financial Protection Bureau (CFPB) is looking to change the Ability-to-Repay/Qualified Mortgage (ATR/QM) rule.
In a letter sent to members of the Senate Subcommittee on Financial Institutions and Consumer Protection, and reported by multiple outlets, CFPB Director Kathy Kraninger wrote that the bureau will propose an alternative to using debt-to-income (DTI) ratio as a factor in qualified mortgages.
The letter stated that the bureau wants an amendment to the ATR/QM Rule that “would move away from DTI and instead include an alternative, such as a pricing threshold (i.e., the different between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction). The proposed alternative would be intended to better ensure that responsible, affordable mortgage credit remains available to consumer in a manner consistent with the purposes of Sections 129B and C of the Truth-in-Lending Act (TILA) and to facilitate compliance with those sections.”
The CFPB also proposed a possible extension to GSE patch. First implemented in 2014, the GSE patch is an exemption to the QM standard that requires a borrower to have a debt-to-income ratio of 43 percent or less. The exemption applies to mortgage loans backed by Fannie Mae and Freddie Mac. The patch is scheduled to expire in January 2021.
According to the letter, the extension would coincide with either the alternative rule being put into place or the GSEs exiting federal government conservatorship.
In July of last year, the CFPB sought industry input on how to deal with the GSE patch expiration.
In response, a coalition of mortgage lenders and industry trade groups, as well as consumer advocacy and civil rights organizations, encouraged the bureau to use the expiration as an opportunity to eliminate DTI requirement on qualified mortgages.
The Mortgage Bankers Association supports the proposals included in Kraninger’s letter.
"MBA appreciates CFPB Director Kathy Kraninger's intention to temporarily extend the GSE patch and move away from the use of a standalone debt-to-income ratio,” said MBA President and CEO Bob Broeksmit.
“MBA has urged the bureau to eliminate the use of DTI ratios as a standalone threshold in the QM definition, which would also remove the need to use the rigid, outdated Appendix Q methodology for calculating borrower income and debt. We look forward to working with the bureau, and other stakeholders, on the proposed rule.”
Others expressed concern about eliminating DTI requirements.
Said Bankrate Chief Financial Analyst Greg McBride: “Eliminating debt-to-income ratios from underwriting guidelines will result in more loans to consumers with already heavy debt loads and is reminiscent of Congress requiring Fannie and Freddie to buy more subprime loans. That didn’t end well.”
“The 43 percent DTI standard came about after the goal posts were moved from the previous, long-held standard of 36 percent,” McBride said. “Now they want to just take the goal posts off the field altogether.”
Last year, the Urban Institute reported that purchase originations with DTI ratios over 43 percent had increased significantly since the GSE patch took effect. About 29 percent of Fannie Mae originations had DTI ratios above 43 percent in 2018, compared with 13.3 percent in 2013. Freddie Mac loans with DTIs over 43 percent increased from 14.1 percent in 2013 to 24.9 percent in 2018.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
