Housing Finance: QM/ATR Rules

CFPB’s Final Rule should make clear that there is room for vibrant, responsible lending across various channels, and in both the QM and non-QM submarkets.

Briefing

Results are in from SFA’s Survey on the Qualified Mortgage rule

SFA’s QM survey was sent to issuers, investors, law firms, mortgage insurers, rating agencies, diligence firms, and data and analytic providers. It provides data that SFA will use to inform our ongoing engagement with the CFPB, providing market-based feedback on how different proposals or aspects of the rule might impact access to credit, credit quality, investor demand, and perceived legal or regulatory risk.

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Under Dodd-Frank, the CFPB implemented the Ability to Repay/Qualified Mortgage (ATR/QM) rule which states that mortgage lenders must make, “a reasonable, good faith determination” of each borrower’s ability to repay the proposed loan. The ATR portion of the rule was designed to prevent borrowers from obtaining loans they could not afford; the QM portion of the rule provides protection from allegations that the lender failed to verify the borrower’s ability to repay the loan.

Since its inception, the CFPB rule has also allowed any loan eligible for purchase by the GSEs to achieve QM status. This exemption from the rule – also called the QM Patch – expires in January of 2021 and was meant to serve as a temporary bridging mechanism while policymakers found a long-term solution to the challenge of appropriately crafting a legal safe harbor from ATR.

As a reminder, the existing QM rule does not provide a safe harbor from liability if a loan’s debt-to-income (DTI) ratio is above 43 percent. The exception to this rule states that any loan approved for purchase by a GSE does receive safe harbor treatment, regardless of the DTI. In many instances, the QM Patch favors borrowers with high DTI ratios having their mortgages funded by the GSEs. Since the inception of the QM Patch in 2014, the share of loans guaranteed by the GSEs with DTIs in excess of 43 percent has increased to nearly 28 percent of their combined portfolio. Large-scale innovation has been limited to the GSEs, whose new product offerings or underwriting advances automatically achieve ATR compliance via QM safe harbor status. SFA believes that, if done properly, DTI can be mitigated by compensating factors. But the current structure of QM and the Patch limit the market’s ability to do so.

On Thursday, July 25th, the CFPB published their long-anticipated Advanced Notice of Proposed Rulemaking (ANPR) on the ATR/QM rule. This ANPR gives industry participants and the public the first insight into how the CFPB will approach the scheduled expiration of the “QM Patch,” presents potential options for transitioning away from the patch and creates a framework for the industry to provide feedback in preparation for this transition. A thoughtful and well-planned transition away from the patch – which the CFPB has committed to – can avoid negatively impacting high DTI homeowner borrowers, many of whom live in low- and moderate-income communities. Allowing additional capital to innovate, lend, and compete on a level playing field will help ensure that homeowners in all communities can be consistently served without increasing risk to taxpayers.

SFA looks forward to engaging with all policymakers on this issue in the coming years. If done properly, the Ability to Repay and Qualified Mortgage rules can help ensure that the entire market can safely serve all prospective homeowners. Transitioning away from the Patch in a smooth and transparent manner can enhance responsible access to credit for all borrowers.

Contact

Dallin Merrill

Senior Vice President, MBS Policy

Dallin.Merrill@structuredfinance.org