The CFPB recently issued an advance notice of proposed rulemaking (ANPR) requesting comments on how to revise the qualified mortgage (QM) provisions of the Regulation Z ability-to-repay rule in view of the impending expiration of the temporary QM for loans that meet the statutory QM criteria and are eligible for purchase or guaranty by Fannie Mae or Freddie Mac. The temporary QM, which is often referred to as the “temporary GSE patch,” will expire on January 10, 2021, or earlier if Fannie Mae and Freddie Mac exit conservatorship. The CFPB notes in the ANPR that it might provide for a short extension of the expiration date, but does not specifically seek comment on an extension.

Background

QM and Non-QM Loans. The ability-to-repay rule provides for two basic types of loans: (1) loans that meet the general ability-to-repay standards, which provide for flexibility but also uncertainty as to when the standards are met, and (2) categories of QM loans that must meet the criteria applicable to the QM category and, depending on the annual percentage rate, qualify for either a safe harbor or rebuttable presumption of compliance. The general QM loan under the rule is based on a strict debt-to-income (DTI) ratio limit of 43%, and there is guidance in Appendix Q to Regulation Z regarding the calculation and verification of debt and income that is based on standards for Federal Housing Administration (FHA) loans.

Basis for Temporary GSE Patch. The CFPB advises in the ANPR that at the time the ability-to-repay rule was adopted in January 2013, it did not believe that a 43% DTI ratio represented the outer boundary of responsible lending, and that the mortgage market at the time was still fragile as a result of the prior decade’s mortgage crisis. The CFPB explains that the temporary GSE patch was intended to help ensure access to responsible, affordable credit for consumers with DTI ratios above 43%, as well as facilitate compliance with the rule by creditors by promoting the use of widely recognized underwriting standards.

CFPB Off-Base Prediction of Market Behavior. When adopting the ability-to-repay rule, the CFPB also believed that as the mortgage market recovered, the reliance on the temporary GSE patch would decrease, as the market would shift to general QM loans and to non-QM loans for consumers with DTI ratios above 43%. The CFPB actually believed that the private mortgage market would support the shift to non-QM loans. The industry knew at the time that a shift away from the temporary GSE patch, particularly to non-QM loans, was unlikely to occur. There simply is too much uncertainty about compliance when making a loan under the general ability-to-repay (i.e., non-QM loan) requirements and, in view of the significant liability for violating the ability-to-repay rule, many creditors are reluctant to make non-QM loans.

The CFPB’s assessment of the ability-to-repay rule, issued in January 2019, acknowledges that QM loans made in reliance on the temporary GSE patch represent a “large and persistent” share of the conforming segment of the mortgage market. One contributing factor noted by the CFPB is the need to follow Appendix Q for general QM loans, as industry members find Appendix Q to lack clarity and the Appendix has not been updated since January 2013.

The CFPB indicates in the ANPR its concern that “as long as the [temporary GSE patch] continues, the private market is less likely to rebound.” When the CFPB adopted the ability-to-repay rule, it did not correctly read how the private market would react to the rule. The CFPB should not repeat this mistake by assuming once again it knows how to read the private mortgage market. The private mortgage market, and not the CFPB, determines what is acceptable to the market. The CFPB should pay heed to comments submitted by industry members in response to the ANPR.

Possible Market Impact of Temporary GSE Patch Expiration. In the ANPR, the CFPB addresses the possible impact on the market of the temporary GSE patch expiration, although the focus is on consumers with higher DTI ratios. The CFPB notes that Fannie Mae and Freddie Mac purchased nearly 52% of all closed-end first-lien residential mortgage loans made in 2018. The CFPB estimates that 31% of the loans had DTI ratios that exceeded 43%, which means the loans would not be eligible for the general QM.

The CFPB identifies three possible results of the temporary GSE patch expiration for consumers with DTI ratios above 43%: (1) some will seek FHA loans, (2) some may be able to obtain loans in the private market and (3) some may not be able to obtain loans. While the expiration of the temporary GSE patch will likely adversely affect higher DTI ratio borrowers, especially if no changes are made to the ability-to-repay rule, including Appendix Q, the adverse consequences will likely reach more than higher DTI ratio consumers.

Topics on Which the CFPB Seeks Comment

The CFPB asks that parties commenting on the various topics raised in the ANPR provide data and analysis to support their views, although parties do not have to resubmit data provided to the CFPB in connection with its assessment of the ability-to-repay rule or in response to the various requests for information issued by the CFPB in 2018.

General QM Loan Definition.

Direct Measures of a Consumer’s Personal Finances. The CFPB notes that it is considering whether to propose revisions to the general QM loan definition and, in particular, whether the definition should retain a direct measure of the consumer’s personal finances, such as DTI or residual income. The CFPB requests comment on the following issues:

• If the CFPB retains as part of the general QM loan definition a criterion that directly measures a consumer’s personal finances, should the CFPB continue to include only a DTI limit, or should the CFPB replace or supplement the DTI limit with another method (e.g., residual income or another method)?

  • If so, which method and why?

• If the CFPB retains a DTI limit as part of the general QM loan definition, should the limit remain 43%?

  • Should the CFPB increase or decrease the DTI limit to some other percentage?

  • Should the CFPB grant QM status to loans with DTI ratios above a prescribed limit if certain compensating factors are present?

• If the CFPB retains a criterion that directly measures a consumer’s personal finances—DTI ratio, residual income, or some other measure—should creditors be required to continue using Appendix Q to calculate and verify debt and income?

  • Should the CFPB replace Appendix Q?

  • If the CFPB retains Appendix Q, how should it be changed or supplemented?

• If the CFPB does not retain Appendix Q or permits use of an alternative, what standard should the CFPB require or permit creditors to use to calculate and verify debt and income?

  • Should the CFPB specify in Regulation Z an existing version of a widely used method of calculating and verifying debt and income that creditors would be required to use?

  • Or, to provide flexibility to creditors, should the CFPB combine a general requirement to use a “reasonable method” with the option to use, as a safe harbor, a specified, existing version of a widely used method for calculating and verifying debt and income?

  • If the CFPB were to specify an existing version of a widely used method for calculating and verifying debt and income under either of the approaches described in this paragraph, which method (or methods) should be allowed?

    • Should Appendix Q be one of them?

Alternatives to Direct Measures of a Consumer’s Personal Finances

The CFPB advises that parties have suggested that the general QM definition not be based on DTI or other direct measures of a consumer’s personal finances. Suggestions include basing the definition only on the statutory QM loan restrictions (i.e., prohibitions on certain loan features, requirements for underwriting and a limitation on points and fees), and using factors that do not directly measure a consumer’s personal finances and may be more predictive of default than DTI or other direct measurements. One particular suggestion is using the statutory QM criteria along with the loan pricing, which is based on credit risk.

The CFPB requests comment on the following:

• Whether standards that do not directly measure a consumer’s personal finances are consistent with, and further the Truth in Lending Act’s purpose of, ensuring that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability-to-repay the loans.

• The advantages and disadvantages of such standards relative to standards that directly measure a consumer’s personal finances, including DTI ratio and residual income.

• If the CFPB were to adopt standards that do not directly measure a consumer’s personal finances, whether the CFPB should retain the current line separating safe-harbor and rebuttable-presumption QMs or modify it and, if so, how.

• If the CFPB were to adopt standards that do not directly measure a consumer’s personal finances, whether the CFPB should further specify or clarify the grounds on which the presumption of compliance can be rebutted.

Other Temporary GSE Patch Issues

• To minimize disruption to the mortgage market when the temporary GSE patch expires, should the CFPB consider any other changes to Regulation Z’s ability-to-repay and qualified mortgage provisions (i.e., other than changes discussed in response to prior questions)?

• To conduct an orderly rulemaking process and to smooth the transition to any new general QM loan definition, how much time would the industry need to change its practices following the issuance of a final rule with such a new definition?

• If the answer depends on how the CFPB revises the definition, the CFPB requests answers based on alternative possible definitions.

The draft Federal Register notice indicates that comments on the ANPR will be due 45 days after publication in the Federal Register. That is a short comment period given the significant issues involved, but is likely based on the need for a compressed rulemaking timeframe in view of the impending January 10, 2021, expiration of the temporary GSE patch. The CFPB simply waited too long to focus on this important issue.