On July 25th, the CFPB announced plans to allow the temporary Qualified Mortgage (QM) status given to loans eligible for purchase by Fannie Mae or Freddie Mac (the GSEs) to expire. However, the agency stated it could allow a short extension past the January 10, 2021 expiration date, and is in any case soliciting public comments on the general QM definition, including its income and debt documentation requirements.
When the CFPB issued its Ability-to-Repay/QM Rule in response to the Dodd-Frank Act, it sought to provide some bright-line tests for loans deemed generally safe for residential mortgage borrowers. The CFPB decided that a debt-to-income ratio (DTI) that does not exceed 43% was an appropriate proxy, along with several other factors. While the CFPB believed that many consumers can afford a DTI above 43%, those consumers should be served by the non-QM market, where lenders must individually evaluate the consumers’ compensating factors. However, the CFPB recognized that it may take some time, post-crisis, for a non-QM market to develop, even for credit-worthy borrowers. Accordingly, the CFPB created a category of loans that would temporarily enjoy QM status – loans that meet the GSEs’ underwriting criteria (plus a few other requirements). The CFPB set the expiration date for the temporary QM category at five years (unless the GSEs were to emerge from conservatorship prior to that).
Now, several years later, the CFPB has found that the temporary GSE QM “patch” represents a “large and persistent” share of originations, and likely was the reason the Rule did not result in decreased access to credit for those with DTIs over 43%.