The federal agency charged with consumer financial protection on Thursday issued an advance notice of proposed rulemaking (ANPR) that asks, among other things, whether a direct measure of a consumer’s personal finances – such as debt-to-income (DTI) ratio – should be retained as a requirement for the rule’s safe harbor after a temporary rule provision treating agency-backed mortgages as “qualified mortgages” (QMs) expires in early 2021.
The Consumer Financial Protection Bureau (CFPB) ANPR asks this and other questions related to the expiration of the temporary QM provision – also known as the “GSE patch” – applicable under the bureau’s ability-to-repay/qualified mortgage (ATR/QM) rule to certain mortgage loans eligible for purchase or guarantee by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The provision is scheduled to expire Jan. 10, 2021.
The rule provides QM loans a safe harbor from liability (or presumption of compliance with the rule’s ATR requirements). A QM complies with the rule’s 43% cap on a consumer’s DTI ratio, but a loan underwritten to satisfy the temporary QM provision, the “GSE patch,” is not required to meet that cap.
The bureau says it plans to allow the GSE patch to expire in January 2021, or after a short extension if necessary “to facilitate a smooth and orderly transition away” from it.
The ANPR invites comments on possible amendments to the ATR/QM rule, including whether to revise Reg Z’s definition of a qualified mortgage in light of the GSE patch’s scheduled expiration. One of the issues for comment is whether the QM definition should retain a direct measure of a consumer’s personal finances – for example, a DTI ratio – and whether the definition should include an alternative method for assessing financial capacity.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Truth in Lending Act (TILA) to establish ATR (ability-to-repay) requirements for most residential mortgage loans. TILA identifies factors a creditor must consider in making a reasonable and good faith assessment of a consumer’s ATR and defines a category of QMs (qualified mortgages) for which creditors may presume compliance with the ATR requirements.
The ANPR states that based on National Mortgage Database (NMDB) data, there were approximately 6.01 million closed-end first-lien residential mortgage originations in the United States in 2018. The GSEs purchased or guaranteed an estimated 52%, or about 3.12 million, such loans in 2018. Of those, an estimated 31%, or about 957,000 loans, had DTI ratios greater than 43%. The bureau said it estimates that 16% of all closed-end first-lien residential mortgage originations in 2018 fell within the temporary GSE QM loan definition but not the general QM loan definition.
The ANPR is out for comment for 45 days following its publication in the Federal Register.