On July 25, 2019, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) seeking comments regarding Regulation Z’s General Qualified Mortgage definition. In the ANPR, the Bureau announced that it plans to allow the Temporary GSE Qualified Mortgage (Temporary GSE QM or Temporary Patch QM) under the CFPB’s Ability to Repay/Qualified Mortgage Rule (ATR/QM Rule) to expire in January, 2021 as scheduled, or after a short extension if necessary, to facilitate a smooth and orderly transition. Under the Temporary GSE QM, QM status is conferred on mortgages that are eligible to be purchased or guaranteed by either Fannie Mae or Freddie Mac while under the conservatorship of the FHFA. According to the ANPR, these loans “represent a ‘large and persistent’ share of originations in the conforming segment of the mortgage market and comprise the majority of the purchase-mortgage market.
The CFPB is considering whether to propose to revise the ATR/QM Rule’s General QM definition in light of the planned expiration of the Temporary GSE QM. Comments are due September 16, 2019, 45 days from publication of the ANPR in the Federal Register.
The ATR/QM Rule establishes the “General QM,” which among other restrictions, requires that the consumer/borrower’s total monthly debt to total monthly income (DTI ratio) must be no greater than 43%. The standards for calculating and verifying debt and income for this requirement are contained in Appendix Q of the ATR/QM Rule, which was taken from FHA underwriting guidelines maintained by FHA when the ATR/QM rule was issued in 2013.
The ATR QM rule does not prescribe a particular DTI limit for Temporary GSE QM loans, as long as they meet the GSEs’ DTI requirements, the GSEs’ other underwriting criteria, and are eligible for GSE purchase. The CFPB explains that the Temporary GSE QM was established when the market was fragile to “help to ensure access to responsible, affordable credit for consumers with DTI ratios above 43 percent, as well as facilitate compliance by creditors by promoting the use of widely recognized, federally related underwriting standards.”
Earlier this year, the Bureau released its “Five Year Look Back” or Assessment Report concerning the ATR/QM Rule and found that GSE QM loans maintained a “large and persistent” share of originations in the conforming mortgage market. The ANPR cites several reasons for this including the perceived lack of clarity of Appendix Q, that Temporary GSE QMs can accommodate demand for mortgages above 43% DTI, and the GSEs’ highly liquid secondary market—the GSEs held a 71% share of the conforming mortgage market in 2017. See WBK’s article on the findings of the ATR/QM Rule Assessment Report.
The CFPB explains that it did not intend to make the Temporary GSE QM loan provision permanent, and it is concerned about reliance on the GSEs’ underwriting standards, noting that one GSE loosened its underwriting standards in ways that proved unsustainable. Additionally, the CFPB is concerned that a permanent GSE patch could stifle innovation and the development of competitive private-sector approaches to underwriting, and prevent the private securitization market from rebounding. The ANPR indicates that the expiration of Temporary GSE QMs will likely result in several responses, including increased FHA lending, an increased private market, and a lessening of borrowers seeking high DTI loans.
Topics on Which the CFPB Seeks Comment
In the ANPR, the Bureau is seeking specific comment on several questions, including as examples:
- whether the general QM classification should retain a DTI ratio or substitute another method to “measure a consumer’s personal finances;”
- whether a 43% DTI is the appropriate measure;
- whether QM status should be granted to loans with DTI ratios above prescribed limits if certain compensating factors are present;
- whether Appendix Q should be retained, changed or supplemented;
- whether in lieu of maintaining a DTI ratio, the rule should only maintain QM’s statutory restrictions on risky features and underwriting requirements and/or possibly eliminate the DTI requirement for loans at particular APRs, such as 150 basis points over the average prime offer rate (APOR) (giving those loans a safe harbor) and possibly providing a rebuttable presumption for loans between 150 and 300 points over APOR, and requiring a 43% DTI ratio to qualify as QM above that;
- whether the rule should require the consideration of credit score or LTV in lieu of DTI;
- whether the Bureau should retain the current line separating safe harbor and rebuttable presumption QMs; and
- what amount of time would the industry need to change its practices following the issuance of a final rule with a new QM definition.
Considering the importance of the QM provisions generally, and the patch in particular, to the mortgage market and consumers, numerous comments on the ANPR can be expected from all quarters of the industry and the advocacy community. Following consideration of comments on the ANPR, a Proposed Rule for public comment is likely to follow within months afterwards.