CFPB Proposes Removing DTI Requirement from Qualified Mortgages
Written By: Joel Palmer, Op-Ed Writer
The Consumer Financial Protection Bureau issued a pair of Notices of Proposed Rulemaking (NPRMs) last week, one of which aims to eliminate debt-to-income (DTI) requirements from qualified mortgages.
The NPRMs were made to address the impending expiration of the GSE patch, set to expire in January.
First implemented in 2014, the GSE patch is an exemption to the qualified mortgage 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.
One of the NPRMs deals with the general definition of a qualified mortgage. The other covers a proposed extension of the patch to at least April 1, 2021.
The first NRPM proposes to amend the qualified mortgage definition in Regulation Z to replace the DTI limit with a price-based approach. CFPB said this approach would compare a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction. The bureau’s notice said a loan’s price “is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”
Under the proposal, a loan would meet the qualified mortgage loan definition if the APR exceeds APOR for a comparable transaction by less than two percentage points. A higher threshold would be instituted for loans with smaller loan amounts and for subordinate-lien transactions, which the bureau says is important for manufactured housing and for minority consumers.
The proposal would retain the existing product-feature and underwriting requirements and limits on points and fees. And although it would remove the 43 percent DTI limit from the definition, the NPRM proposes that lenders take into account a consumer’s income, debt, and DTI ratio or residual income and verify the consumer’s income and debts.
CFPB said the temporary loans created by the GSE Patch represent a large and persistent share of mortgage originations. If the patch expired without a new definition of a qualified mortgage, the bureau estimates that about 957,000 mortgage loans would be affected. Many of these loans would either not be made or would be made at a higher price, the bureau said.
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.
“The GSE Patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” said CFPB Director Kathleen L. Kraninger.
“The bureau is proposing to replace the patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them. 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.”
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.
