Earlier this month, Consumer Financial Protection Bureau (CFPB) Director Kathleen Kraninger informed Members of the U.S. Senate Banking Committee that the Bureau plans to make key changes that could benefit home buyers, including those who are lower income. Specifically, the Bureau has indicated that it will replace the Debt-to-Income (DTI) Ratio metric in the Ability-to-Repay (ATR)/Qualified Mortgage (QM) Rule and extend the “GSE Patch” indefinitely.
The 2008 Dodd-Frank Wall Street Reform and Consumer Protection Act established the Qualified Mortgage (QM) Rule, a consumer protection requiring mortgage lenders to properly evaluate a borrower’s ability to repay on a mortgage loan. Within the QM Rule is the ATR requirement, which requires lenders to review income, assets, employment, DTI, and other factors in evaluating a borrower’s application.
DTI, which is a borrower’s monthly debt payments divided by gross monthly income, was set by CFPB at a 43 percent threshold and borrowers were required to be at or below that figure for most lenders to consider them for a qualified mortgage. However, the QM Rule created a temporary exemption through January 2021, also known as the GSE Patch, for Fannie Mae and Freddie Mac to purchase qualified mortgages from borrowers above the 43 percent threshold.
This major news of the GSE Patch extension comes in response to stakeholder input from the CFPB’s Fall 2019 Advanced Notice of Proposed Rulemaking (ANPR), which cited the Bureau’s intent of making changes to the ATR/QM Rule. OFN, in addition to other partners involved in housing policy, responded to the ANPR by calling for the elimination of DTI and expressing concern over the expiration of the GSE Patch.
Although certified CDFIs are exempt from the ATR requirements in the QM rule, including DTI, we believe that creditworthy borrowers, particularly those who are lower income, deserve greater access to homeownership opportunities and should be fairly evaluated when applying for a mortgage loan. As CFPB weighed potential changes to the ATR/QM Rule and the looming expiration of the GSE Patch, OFN decided to comment on the ANPR for two primary reasons:
- DTI does not adequately evaluate a borrower’s ATR. According to the Urban Institute, for each year since 2011, the 90-day delinquency rate for loans with DTI ratios over 45 percent is actually less than that for loans with DTI ratios between 30 and 45 percent, thus demonstrating the limitations of the DTI predictor. The elimination of the DTI ratio could allow more creditworthy borrowers to get access to prime and near-prime mortgages while still ensuring proper protections for lenders and borrowers under the previously cited provisions in the ATR/QM rule.
- The January 2021 expiration of the GSE Patch would impact millions of creditworthy borrowers. According to the Urban Institute, the GSE Patch has facilitated access to homeownership for approximately 3.3 million creditworthy borrowers. In 2018 alone, the GSE Patch accounted for an estimated $260 billion, or 16 percent, of home loan originations that met the QM rule because of the GSE Patch.
For any questions regarding these changes, please email Jamal Habibi at email@example.com.