Consumer groups, lenders find common cause against CFPB mortgage provision
Consumer advocates and lenders are joining forces to try to revamp or eliminate a key part of the Consumer Financial Protection Bureau's "qualified mortgage" rule establishing underwriting standards for most of the housing market.
Lenders fear the market will take a major hit under an agency plan released last month that would end an exception to QM given to loans bought by Fannie Mae and Freddie Mac. Under current rules, the CFPB requires lenders to verify a borrower's ability to repay a loan by giving protections to QM loans with certain features such as a 43% debt-to-income ratio. But that requirement was never fully implemented because the CFPB granted an exemption from the DTI limit if Fannie and Freddie bought the loan.
With the so-called QM patch set to expire in January 2021, consumer advocates are concerned that loans to low- and moderate-income borrowers with DTI limits above 43% will no longer be eligible to be sold to Fannie or Freddie, making lenders far less likely to originate them.
“The question on the table is should 43% DTI—or 45% DTI—be the cutoff for a loan to be called a qualified mortgage?” said Eric Stein, a senior vice president and housing expert at Self Help Credit Union, an affiliate of the Center for Responsible Lending. “And if 43% is the cutoff, does that mean some loans are not going to be made or will they have riskier terms and higher prices?”
Though advocates and industry are rarely aligned, they are starting to coalesce around a plan that would call for the elimination of the CFPB’s 43% DTI limit, which would also scrap a little-known list of underwriting requirements called Appendix Q.
Meg Burns, a senior vice president at the Housing Policy Council, is leading the effort to build consensus around scrapping the limit altogether. Lenders, trade associations, consumer advocates and civil rights groups have signed a draft letter proposing that the CFPB remove any DTI requirement and allow the QM definition to be based solely on safe product features.
"Debt to income is not intended to be a stand-alone measure of capacity to repay, and it is not an indicator of credit risk on its own," said Burns, a former senior associate director in the Federal Housing Finance Agency's Office of Housing and Regulatory Policy. "DTI is relevant only in the context of the full financial profile of the household; it cannot be a stand-alone independent measure of credit capacity.”
The CFPB's QM rule eliminated a whole swath of loan characteristics that caused defaults in the financial crisis including loans with negative amortization, interest-only payments or balloon payments. In addition, QM loans cannot have total points and fees that exceed 3% of loan amount and the term must be 30 years or less.
CFPB Director Kathy Kraninger has 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 seeks to release Fannie and Freddie from conservatorship.
Isaac Boltansky, director of policy research at Compass Point Research & Trading, said he expects the CFPB will ultimately extend the patch beyond the 2021 deadline because so much mortgage volume is at stake. If the patch were eliminated, roughly 15% of home loan volume, or between $200 billion to $300 billion in loans, would be affected, according to Moody’s Investors Service.
"This is 15% of all mortgage volume, so it has to be handled in a thoughtful and tactical manner," Boltansky said.
Nearly a third of GSE-backed loans would not qualify for QM status without the exemption, making investors far less interested in purchasing them because they are considered riskier. Still, eliminating the patch would go a long way toward reducing the government's footprint in the mortgage market, a key goal of Trump regulators.
Since the QM rule went into effect in 2014, Fannie and Freddie have gradually increased the number of loans they purchase with high DTI ratios. The government-sponsored enterprises now back loans with DTIs as high as 50%.
Some mortgage experts suggest that other metrics might be used as a replacement for the CFPB's DTI cutoff, ones that protect borrowers and do not affect the volume of loans sold to Fannie and Freddie.
Laurie Goodman, vice president of housing finance policy at the Urban Institute, has argued for a safe harbor that is based on a loan's annual percentage rate, which considers a wider set of borrower, property and loan characteristics, including DTI.
Her research last year found that an annual percentage rate that is no more than 150 basis points over the average prime-offered rate should provide a safe harbor and encourage more lending and innovation.
"We are a strong supporter of the market spread solution rather than DTI because DTI is far less predictive than either LTV or FICO when it comes to predicting default risk," Goodman said.