Addressing the Jan. 10, 2021 expiration of the so-called “GSE Patch” is the aim of two proposed rules – one establishing a “price-based approach,” and the other to extend the “patch” until a final rule on the first proposal is made effective – issued by the federal consumer financial protection agency Monday.
The two proposals from the Consumer Financial Protection Bureau (CFPB) were released as notices of proposed rulemakings (NPRMs). The agency said the pair of regulatory changes are intended to “ensure a smooth and orderly transition away from the temporary GSE QM loan definition and to maintain access to responsible, affordable mortgage credit upon its expiration.
The “GSE Patch” refers to a temporary qualified mortgage (QM) provision 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 first NPRM would amend the general QM definition in Regulation Z to replace the debt-to-income (DTI) limit with what the agency called a “price-based approach.” The agency said it was proposing that approach because the agency preliminarily concluded “that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”
CFPB said that, for eligibility for QM status under the general QM definition, it is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which it said is “particularly important for manufactured housing and for minority consumers.” The agency said it also 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.
The second NPRM would extend the GSE Patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z, CFPB said. “The Bureau is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments take effect as defined in the first NPRM,” according to a release.
The agency said that, in addition to announcing the proposals, it has also provided “unofficial redlines” illustrating the changes that the NPRMs would make to its existing rules and a summary of the proposed changes.
According to bureau Director Kathleen Kraninger, the patch’s expiration will establish a transparent, level playing field to consumers’ benefit with more vigorous competition in mortgage markets. “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,” she said in a statement. “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.”