Residential: Industry agrees – it’s time to rethink the QM 43% DTI limit

Over the summer, the Consumer Financial Protection Bureau (CFPB) announced plans to let the Qualified Mortgage (QM) patch for government-sponsored enterprise (GSE) backed loans expire. Having had time to consider the impacts this action would have on the housing market, mortgage industry stakeholders are urging the CFPB to re-examine the QM’s 43% debt-to-income (DTI) ratio limit before phasing out the GSE patch.

“While the industry as a whole has been largely supportive of ending the QM patch, there has been a lot of concern expressed among stakeholders around a rapid transition to a 43% DTI limit for GSE loans,” said Tom Cronin, Managing Director at SitusAMC.

The original Ability-to-Repay (ATR)/QM rule established criteria for lenders to make a reasonable and good-faith determination that a borrower is capable of repaying a loan back. To provide lenders safe harbor from potential violations of the regulation, the CFPB created the QM standard, which restricts riskier features, such as negative amortization and balloon payments, and prohibits loans above the 43% DTI threshold. Lenders that adhere to the narrower QM requirements receive stronger legal protections from liability.

The GSE patch, however, provided loans backed by Fannie Mae and Freddie Mac automatic QM safe-harbor status. “The expiration of the GSE patch, set for January 10, 2021, is likely to impact a large volume of GSE loans,” said Cronin. According to the Urban Institute, as of May last year, more than a quarter of GSE loans exceeded 43% DTI.

A 23-member industry coalition agrees that the 43% DTI limit could be overly burdensome on the housing market, negatively affecting the availability of affordable mortgage credit. The coalition includes the American Bankers Association, Bank of America, Consumer Bankers Association, Center for Responsible Lending, Credit Union National Association, Housing Policy Council, Mortgage Bankers Association, National Community Reinvestment Coalition, National Housing Conference, PNC, Quicken Loans and Wells Fargo. The group of nearly two dozen stakeholders offered a “consensus position” in a letter to CFPB Director Kathleen Kraninger earlier this month.

The coalition proposed substantive changes to the ATR/QM rule, coinciding with the GSE patch expiration. Specifically, the letter recommends eliminating the DTI limit from QM requirements. The letter states, “The GSE Patch has provided an alternative to the DTI ratio threshold, as well as relief from the rigid requirements for verifying and calculating income, assets, and debts for DTI ratios under Appendix Q for non-W-2 wage earners.”

The letter cites research that estimates the GSE patch allowed more than $260 billion in loan originations to receive QM coverage last year. “After the Patch expires, the best way to enable fair market competition across all lending channels while also ensuring that these creditworthy individuals can be served in a safe and sound manner under the existing ATR-QM framework is to eliminate the DTI ratio for prime and near-prime loans and with it Appendix Q,” the letter explains.

“This kind of wide-ranging consensus is incredibly important as the CFPB re-evaluates the one regulation that has arguably defined the entire mortgage lending landscape for the past six years,” said Cronin.

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