CFPB ending special treatment for Fannie, Freddie in mortgage rule

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WASHINGTON — The Consumer Financial Protection Bureau is planning to end its special treatment for certain mortgages backed by Fannie Mae and Freddie Mac in the agency's underwriting rules, Director Kathy Kraninger said Thursday.

The CFPB's regulation requiring lenders to verify their borrowers' ability to repay includes protection for a category of loans known as "qualified mortgages." So-called QM loans include certain features such a 43% debt-to-income limit.

But the rule, which was issued in 2013 and took effect in 2014, included a temporary exemption for loans backed by the government-sponsored enterprises. Fannie and Freddie mortgages are automatically QM, even with a higher DTI ratio. Butthat provision, known as the GSE "patch," is set to expire in January 2021.

Kraninger said the CFPB intends to shift away from the patch or consider only a short extension to “facilitate a smooth and orderly transition” as the Trump administration launches renewed efforts to release Fannie and Freddie from conservatorship. Nearly a third of GSE-backed loans currently enjoy the benefits of the exemption.

“The top line is the patch is going to expire,” Kraninger said in a meeting with reporters. “We are amenable to what a transition would look like.”

In an advance notice of proposed rulemaking released Thursday, the CFPB also asked for public comment on several amendments to the QM rule, including if “mortgage” as defined in Regulation Z should be revised, whether the QM definition should take into account other methods for assessing a borrower’s ability-to-repay and whether or not Appendix Q — which sets standards for documenting income to determine whether a loan qualifies for QM — should be replaced.

However, the proposal does not ask for comment on what the CFPB should do with the patch leading up to its expiration.

Kraninger was joined at the press announcement by Mark Calabria, director of the Federal Housing Finance Agency, Fannie and Freddie's regulator.

As it stands, the QM patch “exacerbates an unlevel playing field” between the GSEs and the rest of the mortgage market, Calabria said. “I ultimately believe Fannie and Freddie should play by the same rules as everyone else.”

Yet while ending the patch may worry some lenders, the industry has also been calling for general changes to QM. Many mortgage industry insiders have found the CFPB's QM criteria to be restrictive, saying the result is lenders are cautious about how they structure loans.

Opponents of the QM patch have long argued that the exemption for Fannie and Freddie gives the mortgage giants an edge that makes competition more difficult, while others contend that if the patch were to expire, the third of GSE-backed loans that take advantage of the QM patch would become entrenched in legal challenges, which would risk upending the mortgage market.

Calabria, however, said estimates that a third of GSE loans take advantage of the QM patch are “unrealistic worst-case scenarios.”

“The reason for the ANPR now is to learn what we need to do to minimize market disruption,” he said.

The CFPB also asked for comment on altering the DTI limit, asking for the public to provide input on if the limit should remain at 43%, or if the limit should be increased or decreased, as well as if loans with “certain compensating factors” above the DTI ratio should be granted QM status.

The patch, which was added to the QM rule under former CFPB Director Richard Cordray, was always intended to be temporary, Calabria added.

Yet Kraninger indicated the bureau did not want a rough landing for loans affected by the expiring provision.

“We could have said nothing,” Kraninger said. “At this point, we’re saying we are at least open to hearing some specific feedback about what the right path.”

The volume of Fannie and Freddie loans that exceed the 43% DTI ratio has increased in recent years, suggesting the mortgage giants are taking on more risk, said Calabria.

Ending the QM patch is “a critical component of moving toward a competitive mortgage finance system,” he said.

Calabria said he does not think the expiration of the patch will affect the GSEs’ market share.

“I suspect a lot of originators are used to dealing with Fannie and Freddie, and they’ll stick with Fannie and Freddie,” he said.

Earlier this year, the CFPB published a report on its qualified mortgage rule, which concluded that rule had little impact on borrowers’ access to credit or pricing, even for borrowers with high debt-to-income ratios. This was because of the patch, the report said, which allowed those borrowers to still obtain loans.

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Qualified Mortgages Regulatory reform GSE reform Kathy Kraninger Mark Calabria CFPB FHFA Fannie Mae Freddie Mac