On July 25, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) that is intended as a first step in an orderly expiration of the so-called GSE patch, which confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac while those entities operate under FHFA conservatorship. The patch expires in January 2021, or when Fannie and Freddie exit their conservatorships, whichever comes first. The ANPR solicits feedback on amending Regulation Z and the Ability to Repay/Qualified Mortgage Rule (ATR/QM Rule) to minimize disruption from the patch's expiration. Comments are due 45 days after the ANPR's publication in the Federal Register, which has not occurred as of the publication of this Special Alert.
The Bureau has previously solicited comments on the ATR/QM Rule, including the GSE Patch -- first through a request for information relating to its adopted regulations in March 2018, and then in its ATR/QM Rule Assessment Report in January 2019.
The ANPR states that "[t]he Bureau currently plans to allow the Temporary GSE QM loan category to expire in January 2021 or after a short extension, if necessary, to facilitate a smooth and orderly transition away from the Temporary GSE QM loan category" and goes on to state that "[t]he Bureau does not intend to make the Temporary GSE QM loan provision permanent."
The Bureau notes that the GSEs' share of the conventional/conforming mortgage market is roughly 71% and that creditors typically offer GSE Patch loans even when they could originate a General QM utilizing the safe harbor contained in 12 C.F.R. 1026.43(e)(2) for loans that conform to specific underwriting criteria set forth by the Bureau, including a maximum 43% debt-to-income (DTI) ratio. It states that "[t]he continued prevalence of Temporary GSE QM loan originations is contrary to the Bureau's expectation at the time of the ATR/QM Rule."
The Bureau gave three main reasons why it believes GSE Patch loans have remained so prevalent:
1. Appendix Q, which mandates underwriting criteria for determining a borrower's income and debts for purposes of calculating DTI ratios, is both restrictive (allowing fewer consumers to qualify), poorly adapted to part-time and self-employed individuals (restricting access to credit for these borrowers) and unclear (causing investors to prefer GSE loans for their lower compliance risk and, therefore, incentivizing creditors make more GSE loans).
2. As the housing market recovered, DTI ratios have risen along with house prices, and GSE loans can accommodate borrowers with DTI ratios above 43%.
3. GSE loans have a much more robust and liquid secondary market and the volume of non-GSE private market securitizations are still only a fraction of their pre-crisis levels.
The Bureau believes that the GSE Patch is preventing the private securitization market from rebounding, stifling innovation, and it also does not want to continue relying on the GSEs to determine how to appropriately consider a consumer's ability to repay.
The ATR/QM Rule is critical to the functioning of the residential mortgage market because violations of the rule are subject to such substantial liability that mortgage originators, investors and warehouse lenders have mostly confined themselves to Qualified Mortgages. The civil liability for a violation of the ATR Rule is calculated by adding together (i) the consumer's "actual damages" stemming for the violation, (ii) a statutory penalty of $400-$4000, (iii) attorney's fees, and (iv) an amount equal to the sum of all finance charges and fees paid by the consumer. The provision is subject to a three year statute of limitation, but that limitation does not apply to a consumer using the claim as a set-off or recoupment in a foreclosure action, and that set-off or recoupment claim can be made against the loan purchaser.
Topics on Which the Bureau Seeks Comment
Most importantly, the Bureau is considering whether to revise the General QM definition, specifically "whether the definition should retain a direct measure of a consumer's personal finances, such as DTI ratio or residual income, and how that measure should be structured." In other words, it appears that the Bureau is open to eliminating or (more likely) changing the 43% DTI ratio limit (presumably higher) or potentially substituting or supplementing the DTI ratio test with alternative measures such as residual income. The Bureau is also considering measures that indirectly measure a consumer's ability to repay, such as the difference between the loan's APR and the APOR which, proponents suggest, is a marketdriven measurement of a borrower's credit risk that takes into account many different aspects of a borrower's ability to repay. The Bureau is also considering granting QM status to loans with higher DTI ratios when certain compensating factors are present.
The Bureau is requesting comments and data on whether it should continue to include a DTI ratio limit and, if so, what that limit should be--and whether it should vary based on compensating factors. The Bureau is also seeking comments and data with respect to replacing or supplementing the DTI ratio limit with alternative measurements of the borrower's finances, and what the appropriate limits of those tests should be.
The Bureau is also requesting comments about replacing Appendix Q with an alternative standard for documenting and calculating a borrower's income and debts. The ANPR states:
Based on extensive public feedback and its own experience, the Bureau recognizes that Appendix Q's methods for documenting debt and income can be rigid, that its provisions for determining what debt and income can be included in DTI calculations can be difficult to apply, and that it does not provide the level of compliance certainty that the Bureau anticipated.
The Bureau appears to be contemplating either (1) replacing Appendix Q with an existing version of a widely used underwriting methodology (such as Fannie Mae or Freddie Mac's methodologies, or a combination of both) or (2) specifying that creditors use any "reasonable method" and may include a safe harbor for using any widely used underwriting methodology (e.g. Fannie Mae, Freddie Mac, FHA or VA).
Other changes that the Bureau is considering and seeks comments and data on are:
- Whether the Bureau should amend the Rule so that any loan that performs for a set period of time (e.g., two or three years) would automatically convert to a QM on the theory that when a loan defaults after performing for two or three years, it is not reasonable to conclude that the default was caused by the creditor's failure to consider the consumer's ability to repay at consummation.
- Whether the Bureau should amend the general QM definition to require the consideration of LTV or credit score in lieu of the borrower's DTI ratio.
- Whether the Bureau should retain the current distinction between safe-harbor and rebuttablepresumption QMs (i.e., whether the interest rate is 150 bps over the APOR for first-lien mortgages) or modify it and, if so, to what level?
- If the Bureau were to adopt different measures for assessing a consumer's financial position, and it retains a distinction between safe harbor and rebuttal presumption loans, should it further specify or clarify the grounds on which the presumption of compliance can be rebutted (currently the only grounds for rebuttal is the consumer's residual income, with no bright line amount of residual income specified in the Rule).
Given that the GSE Patch was created in order to calm concerns that the mortgage market would be paralyzed without some mechanism for exempting the safest group of loans in the residential mortgage market from the exceptional liability Congress created in enacting the Ability-to-Repay rule, many observers expect residential real estate-related industry groups to work hard in the rulemaking process to preserve as much of the GSE Patch as possible, or to ensure that whatever replaces it will make it similarly easy to prove compliance with the Ability to Repay rule.