According to the Mortgage Bankers Association, the Consumer Financial Protection Bureau intends to revise its Qualified Mortgage definition by moving away from a debt-to-income ratio threshold, and instead adopting a different test, such as one based on the loan’s pricing. The CFPB also apparently indicated it may extend, for a short time, the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “Patch”).
The MBA reports that CFPB Director Kathy Kraninger informed Congress of the agency’s plans for its highly-anticipated QM rulemaking, expected this spring (by late May, but perhaps earlier). In July of last year, the CFPB issued an advance notice of proposed rulemaking to begin addressing the Patch expiration (scheduled for January 2021). For the past five years, the Patch has resulted in a significant presence by the government-controlled enterprises in connection with higher-DTI loans (i.e., those over 43%). The CFPB has insisted it would allow for a “smooth and orderly transition” to the Patch expiration, to give the industry time to respond. According to the recent report, the CFPB will in fact seek to extend the Patch for “a short period.”
The CFPB indicated that a brief Patch extension also is warranted because of other changes the agency intends to make to the general QM definition. Most agree that the general QM, and its reliance on a DTI threshold and the tight income standards in Appendix Q, has unduly restricted affordable credit to worthy borrowers. The CFPB apparently told Congress it intends to move away from its DTI threshold, which could also mean the demise of Appendix Q.
The CFPB may instead adopt a pricing threshold to distinguish QMs from non-QMs going forward. The CFPB otherwise distinguishes loans with an annual percentage rate that exceeds the average prime offer rate by 150 basis points. The CFPB could decide to use that threshold to define QMs in the future.
CFPB also may be considering a common-sense, results-oriented approach – by providing that loans that do, in fact, experience timely payments would be deemed to comply with the ability-to-repay requirement.
While we cannot be certain about the CFPB’s next move until the agency finalizes a rule, the changes described above would afford QM protection to higher-DTI/lower-cost loans that lack certain product features, likely opening those loans to the private capital markets. By changing the QM marketplace, the changes also would, of course, affect the size and nature of the non-QM market. As we previously noted, those changes also could affect the types of loans exempt from credit risk retention in securitizations (QRMs).