At a session during the Mortgage Bankers Association’s Annual event, Consumer Financial Protection Bureau Director Kathy Kraninger announced the extension of the Qualified Mortgage Patch until a new QM Patch is decided on.
“To make it clear to the market that we are going to have a smooth transition to the new QM, the patch will be available until the mandatory compliance date for the new QM,” Kraninger said. “Hopefully that is understandable and helpful to folks. We are moving smartly but expeditiously to pull this together and enable that smooth transition.”
Earlier this year, the bureau announced a proposed rule that would amend the qualified mortgage definition in Regulation Z to replace the debt-to-income limit with a price-based approach, saying it preliminarily concluded that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.
For eligibility for QM status under the General QM definition, the bureau proposed a price threshold for most loans as well as higher price thresholds for smaller loans.
Now, the bureau is making it official, and issuing a final rule to extend the QM Patch.
The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them money. This includes a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43%.
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But Fannie Mae and Freddie Mac are not bound to this requirement, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie Mae or Freddie Mac are allowed to exceed the 43% DTI ratio.
“We believe that a pricing threshold is a more holistic measure of an individual’s ability to repay than DTI alone,” Kraninger said during the session. “We also knew that the 43% DTI, if that were strictly put in place, and strictly followed without the patch as a valve to let off some of that steam, would really preclude access to credit and really reduce the many people, particularly those on the edge, that opportunity for homeownership.”
After being originally set to expire in January 2021, the bureau proposed to amend Regulation Z to extend the QM Patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z.
“Under the rubric of the law, Congress set strict ability to repay requirements, consideration and verification of debt and income is still very much part of the process,” Kraninger said. “But how that gets documented – there are opportunities for innovation here. We are enabling that in terms of allowing the market to and allowing individual lenders to have that flexibility to calculate that in ways that they think is going to make the most sense for their business model, for their credit-making decisions. And so, from that standpoint, there is some opportunity for innovation.”
The bureau also noted that it is “not amending the provision in Regulation Z stating that the GSE Patch will expire if the GSEs (Fannie Mae and Freddie Mac) exit conservatorship.”
